Purchasing power parity (PPP) is the idea that prices and exchange rates adjust to make the cost of goods the same in different countries. Evidence shows that PPP doesn't usually hold in the short term, possibly due to sticky prices and trade barriers. In the long term, factors like government spending and productivity growth can affect the real exchange rate. The relationship between price levels and income levels, known as the "Penn Effect," supports this idea. Overall, whether PPP holds depends on the time period, time horizon, and currencies being compared.