Purchasing Power Parity (PPP)

The principle that, in the long run, currency exchange rates will adjust so that the cost of similar goods and services will tend to be the same in all markets and in all currencies. To preserve purchasing power parity, exchange rate movements will tend to reflect relative inflation rates. Unlike interest rate parity, which is enforced by financial arbitrage, purchasing power parity is an influence enforced, in the long run, by goods and services price arbitrage. See also Interest Rate Parity.

Glossary * P