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Economic Definition of purchasing-power parity. Defined.

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Term purchasing-power parity Definition: The notion that the exchange rate between two currencies should reflect the relative prices of goods purchased in their respective countries. Suppose, for example, that sundials sell for $50 in the United States and 100 queolds in Northwest Queoldiola. Purchasing-power parity then exists if the exchange rate is 2 queolds per dollar. While this parity tends to hold for goods that enter the foreign trade game, it doesn't necessarily hold for the many goods that are produced and consumed without ever crossing a national boundary. Nor does this parity exist if governments are manipulating exchange rates.

 

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