Benjamin Scott Mitchell

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What is Purchasing Power Parity (PPP) and how does it apply to forex?

PPP suggests currencies should equalize based on the cost of identical goods across countries. For example, if a Big Mac costs $5 in the U.S. and ¥500 in Japan, fair value exchange rate should be 100 JPY per USD. Institutions use PPP for long-term valuation models. Retail traders rarely trade directly on PPP but can use it to gauge overvalued or undervalued currencies. Benefits: provides long-term equilibrium benchmark. Risks: markets can stay misaligned for years due to capital flows or sentiment. PPP highlights forex as both economics and psychology—prices may deviate, but fundamentals eventually anchor value.