What is PPP or Purchasing Power Parity?

A classical economist like Hume would understand all this very well . In fact ha (and Ricardo around 1817 and Sweden is Gustav Cassel around 1917 ) would seek , as a clue to the equilibrium level of a flexible exchange rate , the relative behavior of its price level .
purchasing power parity. let America and Europe be at equilibrium , say , at $2.00 per 1 euro . Now let America double all her prices by domestically inflating her M ; and let Europe keep her M limited enough to produce a steady price level . Then ,other things being equal ( such as employment remaining full and there being no inventions , crop failures , traffic , or change in tastes ) , the new Demand and Supply intersection will come at twice the old $2.00 rate , namely , at $4.00 per Euro1-with the dollar depreciating by as much as its price level rises.
The reasoning would be classically simple . with all wages and prices here exactly doubled (and M doubled here to finance them ), we can buy exactly the same physical imports and sell exactly the same physical exports at the new exchange rate that has doubled like everything else,(it is just as if every American old dollar is now called two American dollars .)
Under floating exchange rates , in the longest run it is the monetary policies of the different countries that ultimately determine their price levels and exchange rates.