Explain the purchasing power parity theory?
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Purchasing power parity:
One popular macroeconomic analysis metric to compare economic productivity and standards of living between countries is purchasing power parity (PPP). PPP is an economic theory that compares different countries' currencies through a "basket of goods" approach.
According to this concept, two currencies are in equilibrium—known as the currencies being at par—when a basket of goods is priced the same in both countries, taking into account the exchange rates.
KEY TAKEAWAYS
- Purchasing power parity (PPP) is a popular metric used by macroeconomic analysts that compares different countries' currencies through a "basket of goods" approach.
- Purchasing power parity (PPP) allows for economists to compare economic productivity and standards of living between countries.
- Some countries adjust their gross domestic product (GDP) figures to reflect PPP.
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