purchasing power parity business definition

A theory that currency exchange rates are in equilibrium when purchasing power in the countries is equalized. For example, if a basket of goods costing 100 euros in Germany costs $140 in Valdosta, Georgia, the currencies should exchange at a rate of 1.40 dollars to the euro. Purchasing power parity can be thwarted by transportation costs, trade barriers, and a lack of competitive markets. Also called law of one price.