Wednesday, April 26th 2017

Relative Purchasing Power Parity

Relative Purchasing Power Parity Meaning:
In foreign exchange terminology, Relative Purchasing Power Parity or PPP refers to a theory that relates the change in the exchange rate between the currencies of two countries to their relative inflation rates. Specifically, Relative PPP equates the ideal spot exchange rate to the ratio of the cost of a good the first economy (expressed in currency one) to the cost of that same good in the second economy (expressed in currency two).

Relative Purchasing Power Parity Example:
In practice, exchange rates often do not conform to Relative Purchasing Power Parity, since the spot rate observed in the market might be considerably greater or less than its ideal parity level. Nevertheless, the ideal Relative PPP level for two currencies may provide a long-term objective for the exchange rate of that currency pair to move toward.
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