Understanding Purchasing Power Parity: Theory, Implications, and Real-World Applications

Introduction

Purchasing Power Parity (PPP) is a key economic theory that seeks to explain the relationship between currencies and the price levels of goods and services in different countries. It posits that in the absence of transportation costs and barriers to trade, identical goods should have the same price when expressed in a common currency. This report aims to delve into the theoretical underpinnings of PPP, its implications for global economics, and its applications in real-world scenarios. By examining these facets, the report seeks to clarify how PPP influences exchange rates, international trade, and economic policy decisions.

Main Body

The theory of Purchasing Power Parity is rooted in the concept of the law of one price, which suggests that in efficient markets, identical goods should sell for the same price when converted to a common currency. This th