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Finance Dictionary and Glossary of Investment Terms
Purchasing power parity
Definition 1.
The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.
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Definition 2.
The theory that, in the long run, identical products and services in different countries should cost the same in different countries. This is based on the belief that exchange rates will adjust to eliminate the arbitrage opportunity of buying a product or service in one country and selling it in another. The theory makes some assumptions that don't hold in the real world, such as ignoring the effects of transportation costs and tariffs.
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