ppp theory predicts that foreign exchange rates are determined by
Purchasing power parity (PPP) is a neoclassical economic theory that states that the exchange rate between two countries is equal to the ratio of the currencies' respective purchasing power. Theories that invoke the purchasing power parity assume that in some circumstances (for example, as a long-run tendency) it would cost exactly the same number of, for example, US dollars to buy euros and then buy a market basket of goods as it would cost to directly purchase the market basket of goods with dollars. A fall in either currency's purchasing power would lead to a proportional decrease in that currency's valuation on the foreign exchange market.