Purchasing Power Parity - PPP

An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.

The relative version of PPP is calculated as:
Purchasing Power Parity (PPP)


Where:
"S" represents exchange rate of currency 1 to currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2

In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency.

For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)


Investment dictionary. . 2012.

Look at other dictionaries:

  • purchasing power parity — perkamosios galios lyginimas statusas T sritis Gynyba apibrėžtis Tų pačių prekių ar paslaugų, kurias tam tikru metu galima nupirkti už valiutą valstybės vidaus ir užsienio rinkose, kiekio palyginimas. atitikmenys: angl. purchasing power parity… …   Lithuanian dictionary (lietuvių žodynas)

  • purchasing power parity — Fin a theory that the exchange rate between two currencies is in equilibrium when the purchasing power of currency is the same in each country. If a basket of goods costs £100 in the United Kingdom and $150 for an equivalent in the United States …   The ultimate business dictionary

  • purchasing power parity — noun : the ratio between the currencies of two countries at which each currency when exchanged for the other will purchase the same quantity of goods as it purchases at home excluding customs duties and costs of transport compare par …   Useful english dictionary

  • purchasing power parity theory — The theory that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent …   Accounting dictionary

  • Relative purchasing power parity (RPPP) — Idea that the rate of change in the price level of commodities in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries currencies. The New York Times Financial Glossary …   Financial and business terms

  • absolute form of purchasing power parity — A theory that prices of products of two different countries should be equal when measured by a common currency. Also called the law of one price …   Financial and business terms

  • relative form of purchasing power parity — Theory that the rate of change in the prices of products should be somewhat similar, but not absolutely the same when measured in a common currency, as long as transportation costs and trade barriers are unchanged. Bloomberg Financial Dictionary …   Financial and business terms

  • relative purchasing power parity — ( RPPP) Idea that the rate of change in the price level of commodities ( commodity) in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries currencies. Bloomberg Financial …   Financial and business terms

  • Purchasing power — is the amount of value of a good/services compared to the amount paid with a currency. Currency can be either a commodity money, like gold or silver, or fiat currency like US dollars which are the world reserve currency. As Adam Smith noted,… …   Wikipedia

  • Parity — is a concept of equality of status or functional equivalence. It has several different specific definitions.* Parity (physics), the name of the symmetry of interactions under spatial inversion * Parity (mathematics) indicates whether a number is… …   Wikipedia

  • parity — parity1 [par′ə tē] n. pl. parities [Fr parité < L paritas < par, equal: see PAR1] 1. the state or condition of being the same in power, value, rank, etc.; equality 2. resemblance; similarity 3. equivalence in value of one currency expressed …   English World dictionary

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