Forex / Economic Theory

Purchasing Power Parity

Definition

An economic theory stating that exchange rates between currencies should adjust over time so that identical goods cost the same in different countries when expressed in a common currency. PPP is used to compare living standards and assess long-run currency misvaluation.

Example
PPP suggests the USD should strengthen against currencies where goods are cheaper, restoring price equilibrium across borders.
Related Terms
CPI (Consumer Price Index) Interest Rate Parity Real Effective Exchange Rate
Frequently Asked Question
What is Purchasing Power Parity (PPP)?
Purchasing Power Parity (PPP) states that exchange rates should adjust so identical goods cost the same globally. It is used to measure fair value of currencies and compare living standards across countries.
APA Citation
Clark, R. (2025). Purchasing Power Parity. VixShield Trading Glossary. Retrieved from https://www.vixshield.com/glossary/purchasing-power-parity
RC
Russell Clark, FNP-C
Author of SPX Mastery series · Founder of VixShield
Last updated:  ·  Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.