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Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are important theories in International Financial Management that explain the relationship between exchange rates, inflation, and interest rates across countries. Both theories are based on the idea that international financial markets tend to maintain equilibrium, although in practice several factors may cause deviations. Purchasing Power Parity (PPP) states that the exchange rate between two countries should adjust according to the relative purchasing power of their currencies. It is based on the law of one price, which suggests that identical goods should have the same price in different countries after converting prices into a common currency. Absolute PPP can be expressed as the exchange rate being equal to the _______ _______ _________ _______ ___ ______ _____ _________ ______ ___.
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