Purchasing Power Parity (PPP)

Exchange rates should equalise the price of identical goods.

In the long run, a basket costing $100 in the US and £80 in the UK implies a 1.25 USD/GBP rate. Deviations (like the Big Mac Index) flag over- or under-valued currencies. PPP is a long-run anchor, not a short-run trading signal.

Formula / theory

S = P_domestic / P_foreign

In Python

implied_fx = price_domestic / price_foreign
misvaluation = market_fx / implied_fx - 1

Purchasing Power Parity (PPP)

Related terms