Purchasing Power Parity

Purchasing power parity (PPP) is an economic theory stating that, in the long run, exchange rates should adjust so that identical goods cost the same across countries once converted into a common currency. It's widely used to estimate whether a currency is over- or under-valued relative to its theoretical "fair" long-term level. PPP is a long-horizon macro concept rather than a short-term trading signal — actual exchange rates can deviate from PPP for years due to interest rates, capital flows, and sentiment.