Purchasing Power Parity (PPP) is the exchange rate determination used to
compare the average cost of goods and services between countries. What this theory implies is that the actions of importers and exporters are motivated by cross country price differences influencing changes in the spot exchange rate. In essences what we have is transactions on one country's current account affects the value of the exchange rate on the foreign exchange market. The foreign exchange market uses the US dollar exchange. The interest rate parity assumes the action of the investors influences the change in the exchange rate. …
