purchasing power parity
- noun (written as purchasing-power parity)an exchange rate shown as the ratio of the purchasing power of one currency against the purchasing power of another, relating to a basket of goods.
- The economic idea that the products priced in one country should have the same price when purchased in another country given the current exchange rate. purchasing power parity is theorized to arise as the result of exchange rate adjustments in response to import/export arbitrage activities to take advantage of any pricing disparities.
- (written as Purchasing Power Parity)Rates of currency conversion that eliminate the differences in price levels between countries are termed purchasing power parity rates of exchange. Each is the ratio of price levels in two jurisdictions having different currencies, where the prices used are those of a common bundle of goods and services. This is sometimes called 'absolute purchasing power parity' to differentiate it from relative PPP, which states that the rate of appreciation of a currency is equal to the difference in inflation rates between it and that in another jurisdiction. The purpose of PPPs is to obtain more reliable ways of making international economic comparisons (for example, of health care expenditures) than can be done by using exchange rates (which are subject to many other determinants). The Organisation for Economic Co-operation and Development (OECD) publishes PPP rates for OECD countries that are regularly updated and compared with exchange rates.