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    Absolute and Relative Purchasing Power Parity

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    Explain purchasing power parity both in absolute and relative terms. What causes deviations from purchasing power parity?

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    In absolute terms, purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. The basis of the theory is the law of one price. The law of one price states that differing prices of a traded good will tend to equalize in the absence of tariffs, other barriers to trade and prohibitively high ...

    Solution Summary

    This solution explains relative and absolute purchasing power parity