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Definition

A point of equilibrium where a basket of goods costs the same in two countries after considering the exchange rate between their currencies. Obviously the wider the basket of products that is used to make this comparison, the more reliable it becomes. Economists use purchasing power parity to determine differences in standards of living and productivity. In general, emerging economies like South Africa have currencies which tend to be undervalued on purchasing power parity because their currencies discount considerable political and economic risk. In other words, a Big Mac is much cheaper in South Africa than in most first-world countries (refer to the Big Mac index).

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