# Definition of Purchasing power parity

The notion that the ratio between domestic and foreign price levels should equal
the equilibrium exchange rate between domestic and foreign currencies.

Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.

# Related Terms:

## Relative purchasing power parity (RPPP)

Idea that the rate of change in the price level of commodities in
one country relative to the price level in another determines the rate of change of the exchange rate between
the two countries' currencies.

Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.

## Conversion parity price

Related:Market conversion price

## Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

## Earning power

Earnings before interest and taxes (EBIT) divided by total assets.

## Interest rate parity theorem

Interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

## Parity value

Related:conversion value

Related: inflation risk

## Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).

## Spot futures parity theorem

Describes the theoretically correct relationship between spot and futures prices.
Violation of the parity relationship gives rise to arbitrage opportunities.

## Basic Earnings Power Ratio

Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
assets.

## empowerment

the process of giving workers the training
and authority they need to manage their own jobs

the quoted price of inventory minus any
discounts allowed plus shipping charges

## interest rate parity

Theory that forward premium equals interest rate differential.

See money base.

## Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.

## Earning Power

A company's ability to generate a sustainable, and likely growing, stream of
earnings that provides cash flow.

## Earning Power

A company's ability to generate a sustainable, and likely growing, stream of
earnings that provide cash flow.
Earnings Management The active manipulation of earnings toward a predetermined target.
That target may be one set by management, a forecast made by analysts, or an amount that is consistent with a smoother, more sustainable earnings stream. Often, although not always, earnings management entails taking steps to reduce and â€śstoreâ€ť profits during good years for use during slower years. This more limited form of earnings management is known as income smoothing.

The purchase of material for direct delivery to the production
area, bypassing any warehouse storage.