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Purchasing Power Parity (PPP)

What is Parity Pricing in International Markets? The theory that states that the exchange rate between one currency and anther is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent Lets further understand the concept:

  • If the exchange rate is AU$1.00 = US$0.60, the exchange rate is in equilibrium when AU$1.00 will buy the same goods in Australia as US$0.60 in the US
  • The price of tradable goods, when expressed in a common currency, will tend to equalise across countries as a result of exchange rate changes
  • Consumers will shift their demand, assuming no international barriers, and purchase goods from the country offering the lowest price for the same goods
  • Where consumers shift their demand abroad, on the basis of price, increased demand will force foreign price rises and therefore re-establish price equilibrium (PPP)

Watch How Inflation Effects Country’s Prices

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