Currency & Forex
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Purchasing Power Parity

The exchange rate that would equalize the price of an identical basket of goods across countries.

Formula

S=PdomesticPforeignS = \dfrac{P_{domestic}}{P_{foreign}}

Variables

SPPP exchange rate
P_{domestic}Home price
P_{foreign}Foreign price

Example

Burger $5 at home, £400 abroad → S = implied rate

Did You Know?

The Economist’s “Big Mac Index” uses PPP to cheekily gauge whether currencies are over- or under-valued.

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