purchasing-power parity theory

Definition

Economics

  • noun the theory that exchange rates are in equilibrium when the amount purchased by one currency equals the amount purchased by another; in theory, if one currency buys more than another, then it is advantageous to exchange the second currency for the first so as to increase purchasing power, with result that the exchange rate would fall because of the influence of the market; in reality, exchange rates tend to be influenced by market dealers more than by comparative purchasing power
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