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What Is PPP or Purchasing Power Parity?

When dealing with different currencies it is important to be able to determine the relative value of each of them. Purchasing power parity (PPP) is a method for determining this comparative value. The theory behind PPP has been around since sixteenth century. It is based on the idea that if markets are effective, there will be the same price for items even if they are in different geographical locations – this is called the law of one price. Where differences do occur in price it can be due to barriers in trade and taxes. In reality there can be a huge difference between the prices of goods in different countries. These prices will also be impacted by things like level of supply and demand. Read the rest of this entry »

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