Suppose the return on a European bond is 8 percent per year. If we expect the US dollar to depreciate with respect to the euro by 12 percent in the next year, what is the expected dollar return on this European bond? A. 7 percent.

The answer is Purchasing Power Parity. In addition, to correct for the incapability to associate purchasing power through countries, it turns to another measure of economic development named purchasing power parity. Conferring to this concept, two currencies are in equilibrium or at par when a market basket of goods in which captivating into account the exchange rate is valued the similar in both countries.