Purchasing Power Parity (PPP) aims to measure relative cost of living between countries of different currencies. It is a calculation that takes into consideration the same set of products and services and the amount of currency required to purchase them in each country. According to the PPP, two currencies are in equilibrium when a set of goods and services has the same value in two countries, considering the exchange rate between them.
For example, if a big mac that costs $ 2 in the US also costs the same value in another country, that means there is a balance exchange rate between the two countries' economies. The principle surrounding this parity is known as the Single Price Law, which says that the price of identical goods should be the same if considered a totally free trade between countries. Thus, if the pricing law works for two countries, it is possible to find the purchasing power parity exchange rate from the prices charged in each economy.
