What does PPP(purchasing power parity) try to do?
Purchasing power parity The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the idea that, in an efficient market, identical goods must have only one price. A purchasing power parity exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods. It is often used to compare the standards of living between countries, rather than a per-capita gross domestic products comparison at market exchange rates. The best known and most used purchasing power parity exchange rate is the Geary-Khamis dollar, also referred to as the international dollar. Market exchange rates tend to fluctuate much more wildly than PPP exchange rates (the “Real Exchange Rate”). Aside from this volatility, consistent deviations of the market and PPP exchange rates are observed, for example (market exchan
