purchasing power parity

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The theory that, after adjusting for the exchange rate, the cost of a good should be the same in all countries. In other words, the rate of exchange between two currencies should be such that each currency has exactly the same purchasing power in its own economy. This is never actually the case, although over the long term exchange rates do appear to adjust to differences in national inflation. This latter proposition is referred to as the relative purchasing power parity theory. See also Big Mac Index.

Subjects: Social Sciences.

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