Purchasing power parity

The rate at which the same goods cost the same

In detail

Purchasing power parity is the exchange rate at which identical goods would cost the same in two countries. Actual rates stray far from it over short periods, though they are held to drift back over long ones. When inflation runs at different speeds, the parity level itself moves. It is used as a rough gauge of whether today's rate looks high or low.

Example

If the same item costs 1,500 yen in Japan and 10 dollars in the US, parity is 150 yen per dollar.

Related terms

Exchange rate Inflation Weak yen, strong yen

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