In economics, what is the value of a country's currency based on the prices of goods in different countries called?

In economics, purchasing power parity is the idea that exchange rates relate currencies according to the prices of comparable goods and services in different countries.

The theory is associated with the law of one price: in an idealized setting without transport costs, taxes, or trade barriers, identical tradable goods should cost the same after currency conversion. If a representative basket is cheaper in one country, its currency may appear undervalued relative to the other under a purchasing-power comparison.

Absolute PPP compares overall price levels, while relative PPP focuses on how inflation differences should be associated with exchange-rate changes over time. Economists use PPP-adjusted figures to compare national output and living standards, but the method is not a prediction of daily market exchange rates.

Services, housing, taxes, trade costs, and non-tradable goods can create large deviations. PPP is therefore a long-run benchmark, not a guarantee that currencies immediately move to equalize every basket.