How does purchasing power parity work?

The PPP theory seems to work well in the long run when the differences in inflation rates between two countries are relatively large.

The PPP conversion rate for China is 3.69 Yuan Renminbi (CNY) for 1 US dollar (IMF calculations, 2008 data, estimates). The real exchange rate (as of 2009-04-03) is 6.83 Yuan Renminbi for 1 US...

PPP exists between any two currencies whenever changes in the exchange rate exactly reflect relative changes in price levels in two countries.

The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law...

Canada's GDP power parity is $1.271 trillion.