Relative Purchasing Power Parity

Posted in Finance, Accounting and Economics Terms, Total Reads: 987
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Definition: Relative Purchasing Power Parity

Purchasing Power Parity helps us to determine how much amount of money is required to buy same quantity of goods and services in two countries.

Relative Purchasing power parity tells us how the PPP is affected by the rate of inflation in the two countries.

For example, Suppose we are determining the PPP of India as compared to America. Now let assume that the PPP of India as compared to US is 52. It means that it costs Rs.52 in India to buy the basket of goods worth $1 in US. Now let assume that the rate of inflation in India is higher than that of the US. Since the rate of inflation is higher in India, it will cost more than that determined in PPP in India to buy the same basket of goods and services. It is due to the inflation.

So Relative Purchasing Power Parity considers inflation factor also as compared to Purchasing Power Parity.


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