Published on September 2, 2020

Purchasing Power Parity


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Purchasing Power Parity (PPP) of a country measures the absolute purchasing power between countries’ currencies using the same amount of goods or services.

Absolute Purchasing Power Parity

In Absolute PPP exchange rates between two countries are in equilibrium while the value of a certain good or service is the same between the countries. It is similar to the Law of One Price.

As an example of Absolute PPP,

Price of a commodity in India / Price of the same commodity in China = Exchange rate between Rupee and Renminbi

 

Relative Purchasing Power Parity

In Relative PPP the percentage of change in the exchange rate between
two nations are equal to the difference between the percentage changes
in the national price levels of a certain commodity over a certain period.

Purchasing Power Parity by Country

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Source : World Bank



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