Purchasing power parity (PPP)

What it means

The proposition that exchange rates adjust so that identical goods cost the same across countries.

The exam angle

A long-run anchor, badly violated in the short run. Relative PPP — that the exchange rate moves with the inflation differential — is the testable version.

Where it appears in the syllabus

• EconomicsCFA Level I · exam weight 6–9% · Market structures, business cycles, policy, trade and exchange rates.
• EconomicsCFA Level II · exam weight 5–10% · Two dense modules: currency equilibrium value and economic growth.

Related terms

• Interest rate parityThe condition that the forward exchange rate differs from the spot rate by exactly the interest rate differential, so…
• Adverse selectionThe problem that arises when the party with better information self-selects into a transaction, leaving the…
• Business cycleThe recurring pattern of expansion, peak, contraction and trough in economic activity.
• Core inflationInflation excluding food and energy prices, which are volatile and often driven by supply rather than demand.
• Fiscal policyGovernment use of spending and taxation to influence aggregate demand.
• Gross domestic productThe market value of all final goods and services produced within a country in a period.