Editing Purchasing power parity (section)

===Exchange rate prediction===

PPP exchange rates are never valued because market exchange rates tend to move in their general direction, over a period of years.  There is some value to knowing in which direction the exchange rate is more likely to shift over the long run.

In [[Neoclassical economics|neoclassical]] [[economic theory]], the ''purchasing power parity theory'' assumes that the exchange rate between two currencies actually observed in the different international markets is the one that is used in the purchasing power parity comparisons, so that the same amount of goods could actually be purchased in either currency with the same beginning amount of funds. Depending on the particular theory, purchasing power parity is assumed to hold either in the [[long run]] or, more strongly, in the [[short run]]. Theories that invoke purchasing power parity assume that in some circumstances a fall in either currency's purchasing power (a rise in its price level) would lead to a proportional decrease in that currency's valuation on the foreign exchange market.