Kaufkraftparität
Kaufkraftparität, often abbreviated as KKP, is an economic theory that suggests that in the long run, exchange rates between currencies should adjust to equalize the prices of an identical basket of goods and services in any two countries. Essentially, it posits that the purchasing power of different currencies should be the same when converted. This means that if a particular item costs 10 US dollars in the United States, the equivalent amount of euros in Germany should be able to buy that same item, after accounting for the exchange rate.
The theory is based on the law of one price, which states that in an efficient market,
In practice, KKP is often used to compare the economic productivity and living standards of different countries.