The rate of currency conversion that equalises the purchasing power of different currencies, i.e. estimates the differences in price levels between different countries. A method of adjustment used to allow for international comparisons of GDP.

PPPs are the rates of currency conversion which equalise the purchasing power of different currencies. This means that a given sum of money, when converted into different currencies at the PPP rates, will buy the same basket of goods and services in all countries. In other words, PPPs are the rates of currency conversion which eliminate the differences in price levels between countries. PPPs also appear in international trade theory in the context of equilibrium exchange rates - that is the underlying rates of exchange to which actual exchange rates are assumed to converge in the long term.

the rate of exchange between two countries at which the price of a representative basket of goods is the same.

The equality of the prices of a bundle of goods (usually the CPI) in two countries when valued at the prevailing exchange rate. Called absolute PPP. The equality of the rates of change over time in the prices of a bundle of goods in two countries when valued at the prevailing exchange rate. Called relative PPP. Implies that the rate of depreciation of a currency must equal the difference between its inflation rate and the inflation rate in the currency to which it is being compared.

Refers to functional equivalency. It is the relationship between the amount of currency to buy a common good in one country and the amount in a second currency to buy the same good in the second country. This is one way to establish an exchange rate between two currencies.

The ratio of the amount on money needed in one nation to buy certain goods to that needed in an other nation to buy the same amount of goods. The exchange rate of local and domestic currency is often a result of purchasing power parity.

Method of valuation implying that the correct exchange rate between two currencies is the one that equalizes the price of the same traded item in both countries. Reinsurance Laying of a primary risk to a secondary insurer.

the prices of goods and services are the same in different nations once adjusted for exchange-rate changes

At the PPP rate, one dollar has the same purchasing power over domestic GDP that the US dollar has over US GDP. PPP could also be expressed in other national cur- rencies or in special drawing rights (SDRs). PPP rates allow a standard comparison of real price lev- els between countries, just as conventional price indexes allow comparison of real values over time; otherwise, normal exchange rates may over- or undervalue purchasing power.

Equal value of money—a situation in which money buys the same amount of goods and services in different currencies. (p. 522)

PPPs are the rates of currency conversion that allow for differences in price levels between countries. Normally they are given in national currency units per US dollar. Take a fixed basket of goods. Suppose it costs $100 in the US and 1000 rupees in India; this indicates that one dollar provides exactly the same purchasing power as 10 rupees. The purchasing power parity (PPP) exchange rate is defined as US$1=10 rupees. For various reasons, the actual exchange rate often diverges from the PPP rate. Back to the top Back to the top

The equality of the value of money in all countries.

A concept in which the dollar equivalent will purchase the same bundle of goods in all economies. In calculating purchasing power parity, adjustments are made to exchange rates to raise or lower the relative value of currencies to equilibrate purchasing power. The basis for the calculation is the dollar. The end result is to raise currency values of low-income countries while maintaining currency values of high-income countries.

This states that the price for a good in one nation should be equal to the price of the same good in any other nation, all things being equal, exchanged at the current rate.

A method of measuring the relative purchasing power of different countries' currencies over the same types of goods and services. Because goods and services may cost more in one country than in another, PPP aims to make more accurate comparisons of standards of living across countries. However, since not all items can be matched exactly across countries and time, the estimates are not always robust.

An exchange rate such that a given amount of a currency will purchase the same amounts of goods and services at home as abroad. Rational choice theory A theory of political economy that focuses on the incentives facing individuals and states and how those incentives affect their behavior. The structure of incentives (costs and benefits) of the international system is seen as an important determinant of state behavior by rational choice theorists.

This theory of fundamental analysis suggests that the exchange rates between two currencies will adjust so that goods in both countries will cost the same.

The exchange rate that equates the cost of goods in two countries.

the theory that exchange rates are determined in such a way that the prices of goods in different countries are the same when measured in the same currency.

Purchasing power risk Pure discount bond

GDP estimates based on the purchasing power of currencies rather than on current exchange rates; such estimates are a blend of extrapolated and regression-based numbers, using the results of the International Comparison Program (ICP); PPP estimates tend to lower per capita GDPs in industrialized countries and raise per capita GDPs in developing countries

The proposition that over the long term, changes in the exchange rate between two currencies are the result of differences in the relative rate of inflation in the two countries concerned

The law of one price. The exchange rates between currencies are equalized when the price of an identical good in two countries has the same purchasing power. PPP refers to the equalization of price levels across countries, thus the exchange rate between two countries should equal the ratio of the two countries price level of a fixed basket of goods & services. In theory without taking into account transportation and other transaction costs, competitive markets will equalize the price level of an identical good in two countries when the prices are quoted in the same currency. When a country's domestic price level is rising, it experiences inflation. In order for that country to return to PPP, that country's exchange rate must be depreciated.

How well someone is able to live in a country. For example, if people in China make half of what people in the U.S. make, but Coca-Cola only costs half as much, then they have equivalent purchasing power parity.

The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.

A comparison of economies based on standardized international dollar price weights, rather than official currency exchange rates.

Purchasing power is the value of money and parity is equality hence, purchasing power parity means that in different currencies and countries, money has equal value. A theory by which the exchange rate between any two currencies adjusts to reflect changes in the price levels within those two countries. Back to the top

This is a method of measuring the relative purchasing power of different countries' currencies for the same types of goods and services. Source: UNDP

Purchasing power parity (PPP) theory was developed by Gustav Cassel in 1920. It is the method of using the long-run equilibrium exchange rate of two currencies to equalize the currencies' purchasing power. It is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price.