Abstract. This research work is focused on evaluating the Purchasing Power Parity (PPP) theory using a sample of the top 20 economies of the world (G-20 countries) for the time period 1960-2022. The primary objective of the research is to understand the implications and utility of PPP theory in the context of time. Additionally, the research aims to test the effectiveness of the PPP theory in the exchange rate determination process. The study relies on derived and actual measures of exchange rates for analysis. It also tries to develop a model for exchange rate determination based on the PPP theory and do a comparative analysis of the results. The study highlights the inefficiencies and efficiencies of the system to suggest for areas of improvement with effective policy implications. The research has found more conclusive evidence supporting the PPP theory in short to medium term rather than long term. Also, it highlights that the actual exchange rates are not caused by price and inflation dynamics, contrary to the common rationale.

Keywords: PPP, Foreign exchange, G-20 nations, Macroeconomics.