Purchasing Power Parity
a.k.a. PPP
The theory that exchange rates should drift toward the level where the same basket of goods costs the same everywhere.
Purchasing power parity (PPP) asks: if a burger costs 5 dollars in New York and 700 yen in Tokyo, shouldn't 5 dollars buy 700 yen? If the actual exchange rate is very different, PPP says one currency is overvalued and should, over time, drift back.
The Big Mac Index is a playful version of this idea. In reality, PPP is a poor short-term timing tool: currencies can stay "too cheap" or "too expensive" for years. It is more of a long-term gravity than a trading signal.
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