Relative Form of Purchasing Power Parity

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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.

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.

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