$50
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$50
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The quantity of a particular basket of basic goods which can be purchased in a certain country with the money produced by that country is known as purchasing power parity or PPP. Parity can be determined by knowing what the same basket of goods would cost in each country under consideration.
For example, the United States generally acts as the PPP standard, and could therefore be given a value of 100. Bermuda, having a PPP value of 154 on this scale, has the highest PPP in the world. The PPP number of 154 implies that goods in Bermuda cost 54% more than what the same goods typically cost in the United States.
Implications of Purchasing Power Parity on Forex Rates
In the foreign exchange market, if purchasing power parity were to prevail, the exchange rate between two countries would theoretically equal the ratio of what would be paid in each country for a fixed basket of goods and services.
If one of the countries is experiencing inflation, where domestic prices for goods are rising, then the currency of that country would depreciate in order to return to purchasing power parity.
The Law of One Price
In economics, the Law of One Price states that
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