Purchasing power parity theory
You'll learn how purchasing power parity theory predicts future exchange rates based on differences in inflation between countries. This video covers the core concept, the PPP formula you'll need in the exam, and how to apply it to practical scenarios.
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In this lesson
- 0:00 Purchasing power parity theory explained
- 0:19 How inflation drives exchange rate movement
- 0:47 PPP formula and calculation method
- 1:25 Common misconceptions about PPP theory
About this lesson
Understanding PPP is essential for FM and AFM papers, where exchange rate movements and international finance decisions are regularly tested. By the end, you'll be able to calculate expected future spot rates and distinguish PPP from interest rate parity—a common exam trap.
Duration: 2m
Transcript
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