what is relative purchasing power parity rppp 
relative purchasing power parity rppp is an expansion of the traditional purchasing power parity ppp theory to include changes in inflation over time purchasing power is the power of money expressed by the number of goods or services that one unit can buy and which can be reduced by inflation rppp suggests that countries with higher rates of inflation will have a devalued currency understanding relative purchasing power parity rppp according to relative purchasing power parity rppp the difference between the two countries rates of inflation and the cost of commodities will drive changes in the exchange rate between the two countries rppp expands on the idea of purchasing power parity and complements the theory of absolute purchasing power parity appp the appp concept declares that the exchange rate between the two nations will be equal to the ratio of the price levels for those two countries and appp is discussed later in this article purchasing power parity in theorypurchasing power parity ppp is the idea that goods in one country will cost the same in another country once their exchange rate is applied according to this theory two currencies are at par when a market basket of goods is valued the same in both countries the comparison of prices of identical items in different countries will determine the ppp rate however an exact comparison is difficult due to differences in product quality consumer attitudes and economic conditions in each nation also purchasing power parity is a theoretical concept that may not be true in the real world especially in the short run in 2023 the purchasing power index of the united states is 115 75 1dynamics of rppprppp is essentially a dynamic form of ppp as it relates the change in two countries inflation rates to the change in their exchange rate the theory holds that inflation will reduce the real purchasing power of a nation s currency thus if a country has an annual inflation rate of 10 that country s currency will be able to purchase 10 less real goods at the end of one year rppp also complements the theory of absolute purchasing power parity appp which maintains that the exchange rate between two countries will be identical to the ratio of the price levels for those two countries this concept comes from a basic idea known as the law of one price this theory states that the real cost of a good must be the same across all countries after the consideration of the exchange rate example of rpppsuppose that over the next year inflation causes average prices for goods in the u s to increase by 3 in the same period prices for products in mexico increased by 6 we can say that mexico has had higher inflation than the u s since prices there have risen faster by three points according to the concept of relative purchase power parity that three point difference will drive a three point change in the exchange rate between the u s and mexico so we can expect the mexican peso to depreciate at the rate of 3 per year or that the u s dollar should appreciate at the rate of 3 per year limitations of rpppusers of rppp information must be mindful of several limitations in the inherent process of calculating rppp some of the limitations include exchange rates can also be influenced by speculative trading and market sentiment therefore actual exchange rates may deviate from rppp calculations rppp vs apppthere s a couple of differences between relative purchasing power parity and absolute purchasing power parity appp first ppp is primarily concerned with comparing the relative price levels of two or more countries to determine their exchange rates absolute ppp is a simpler concept that focuses on the absolute price levels within a single country second ppp suggests that exchange rates should adjust over time to equalize the purchasing power of currencies allowing for a more accurate representation of the real exchange rate appp implies that exchange rates should be fixed or constant based on the ratio of absolute price levels between two countries last ppp takes into account changes in price levels over time while appp does not because app assumes that exchange rates should always be at a constant ratio it does not account for inflation 