4. PURCHASING POWER PARITY In its "Absolute Version” , the purchasing power of different currencies is equalized for a given basket of goods. In the "Relative Version” , the difference in the rate of change in prices at home and abroad - the difference in the inflation rates - is equal to the percentage depreciation or appreciation of the exchange rate.

6. Global Purchasing Power Income disparities between the developed and the developing countries of the world are apparent in a map showing average purchasing power by region.

9. Calculation of purchasing power parity Purchasing power parity is a real value comparison between two currencies. In general, purchasing power parity calculations are used to gauge the spending power of macroeconomic indicators, such as GDP in real terms. But purchasing power parity may also be used to compare the spending power of two currencies against a basket of related goods, such as groceries. To calculate purchasing power parity, analysts use a ratio derived from the price of goods and compared to the prevailing foreign currency exchange rate.

11. Relative Purchasing Power Parity An expansion of the purchase power parity theory, which suggests 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. Relative PPP relates the inflation rate (the change of price levels) in each country to the change in the market exchange rate, according to the following formula: Where St is the spot rate in Foreign Currency/Domestic Currency and Pt is the price level in period t (foreign values are marked by an asterisk). This relation is necessary but not sufficient for absolute purchasing power parity.