Explanation of terms in purchasing power parity theory

Purchasing power parity theory is a theory about exchange rate determination, which was first put forward by British economist Thornton in 1802, and later became an integral part of Ricardo's classical economic theory. The theory holds that the value of money lies in its purchasing power, so the exchange rate between different currencies should be based on the comparison of purchasing power they represent.

Specifically, the purchasing power parity theory holds that in international transactions, the prices of goods and services in different countries should be expressed in the same currency, and the choice of this currency should be a currency with large circulation and high value, such as the US dollar and the euro.

By comparing the purchasing power of currencies in different countries, we can reasonably determine the exchange rate between them, which is helpful to promote international trade and capital flow. Purchasing power parity theory is widely used in economics and has become one of the exchange rate regime choices in many countries and regions.