Relative purchasing power parity

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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.

Relative Purchasing Power Parity

A theory that the purchasing power of two currencies differs by the same proportional rate. This differs from the absolute form of purchasing power parity, which states that the purchasing power between two currencies is the same. However, the concepts are similar because RPPP holds that the absolute form would be true if there were no interference of taxes, quality of products, and other circumstances that change the market. One must take into account all these circumstances to calculate the proportional rate by which the purchasing power changes.
References in periodicals archive ?
This requires that the exchange rate drifts in such a manner as to restore the relative PPP.
2) See Charles Engel's Web page in note 1 for the exact definition of both absolute and relative PPP.
Most studies of PPP, therefore, are based on relative PPP, which does not require either the same basket of goods or the same weights applied to these goods in the price index.
Overvalued" can be a subjective and vague term, but economists usually adopt relative PPP as the metric.
Because aggregate prices are reported as indices rather than levels, most empirical work has tested the weaker hypothesis of relative PPP, which requires only that the real exchange rate be stable over time.
If relative PPP holds, the domestic industry's inflation in the traded sector T, [[Pi].
However, to test the absolute PPP for the countries, the deficiency of the proper price level data available for internationally standardised baskets of goods and its inability' to capture the inflation differentials between countries, researchers often move to the testing of relative PPP [Rogoff (1996)].
The absolute version of PPP (APPP) posits a long-run relation between the bilateral exchange rate and price levels of two relevant countries, while relative PPP (RPPP) suggests comovements of changes in the exchange rate with the inflation differential of two countries.
A less stringent, but more realistic relation is relative PPP.
10) In contrast, relative PPP refers to the relationship between relative change in nominal exchange rate and the differential in relative changes in price levels, that is, [DELTA]s/s = [DELTA]p/p - [DELTA]p/[p.
Deviations from relative PPP imply movements in the real exchange rate.
More appropriately, relative PPP can be expressed as [Delta]ln(e) = [Delta]ln([P.

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