Question

the economical term ppp where apply?

Answer 1

Purchasing power parity (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 or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries. 

How to Calculate Purchasing Power Parity

The relative version of PPP is calculated with the following formula:


Where:

S represents exchange rate of currency 1 to currency 2

P1 represents the cost of good x in currency 1

P2 represents the cost of good x in currency 2

How PPP Is Used

To make a comparison of prices across countries that holds any type of meaning, a wide range of goods and services must be considered. The amount of data that must be collected and the complexity of drawing comparisons makes this process difficult. To facilitate this, the International Comparisons Program (ICP) was established in 1968 by the University of Pennsylvania and the United Nations. Purchasing power parities generated by the ICP are based on a worldwide price survey comparing the prices of hundreds of various goods. This data, in turn, helps international macroeconomists come up with estimates of global productivity and growth. 

Every three years, the World Bank constructs and releases a report comparing various countries in terms of PPP and U.S. dollars. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) use weights based on PPP metrics to make predictions and recommend economic policy. These actions often impact financial markets in the short run. (For related reading, see: IMF, WTO and World Bank: How Do They Differ?)

Some forex traders also use PPP to find potentially overvalued or undervalued currencies. Investors who hold stock or bonds of foreign companies may survey PPP figures to predict the impact of exchange-rate fluctuations on a country's economy.

PPP: The Alternative to Market Exchange Rates 

Using PPPs is the alternative to using market exchange rates. The actual purchasing power of any currency is the quantity of that currency needed to buy a specified unit of a good or a basket of common goods and services. Purchasing power is determined in each country based on its relative cost of living and inflation rates. Purchasing power plus parity equalizes the purchasing power of two differing currencies by accounting for differences in inflation rates and cost of living