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Relative Purchase Power Parity

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An expansion of the purchase power parity theory suggesting that prices in countries vary for the same product but that they differ by the same proportional rate over time. The reasons suggested for this price difference include taxes, shipping costs and differences in product quality.

Notes:

The relative purchase power parity condition suggests that the country with the higher rate of inflation will have a devaluing currency. This is thought to be the case or there will be arbitrage opportunities available.

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