Purchasing power parity

1. Purchasing Power Parity Theory
PPP Theory
Yashavanth G Nayak
Assistant Professor
St Philomena College Puttur

2. Introduction
The Purchasing Power Parity theory
focuses on the inflation- exchange rate
relationships. If the law of one price were
true for all goods and services ,we could
obtain the theory of PPP theory. A Swedish
economist, Gustav Cassel, popularized the
PPP in the 1920’s.

3. Therearetwo
formsof the
PPP theory
Absolute purchasing power parity
Relative purchasing power parity

4. Absolute
purchasing
powerparity
The absolute PPP theory postulates
that the equilibrium exchange rate
between currencies of two countries
is equal to the ratio of the price
levels in the two nations.
Thus,prices of similar products of
two different countries should be
equal when measured in a common
currency as per the absolute version
of PPP theory.

5. Relative
purchasing
powerparity
The relative form of PPP theory is
an alternative version which
postulates that the change in the
exchange rate over a period of time
should be proportional to the
relative change in the price levels in
the two nations over the same
period.

6. This form of PPP theory accounts for
market imperfections such as
transportation costs, tariffs and quotas.
Relative PPP theory accepts that because
of market imperfections prices of similar
products in different countries will not
necessarily be the same when measured in
common currency. What it specifically
states is that the rate of change in the
prices of products will be some what
similar when measured in a common
currency as long as the trade barriers and
transportation costs remain unchanged.

7. Thank you