What are the different methods for determining PPP?

PPP or parity of purchasing power is a term used to describe the steps that need to be taken to achieve the balance between the purchase power of the currency issued by one nation with the purchase power of the currency issued by another nation. PPP setting usually requires consideration of factors, such as a exchange rate that applies to two participating currencies, and then takes into account the cost of specific goods using the currency of each nation. With this information in the hand, it is possible to find out whether the current level of parity between these two nations is considered acceptable or whether some adaptation is necessary to achieve a fairer balance.

One of the simplest ways to understand how PPP is determined is to consider the price of a new suit of the same brand and design, with this suit offered for sale in two different countries. If, for exampleAD is offered for sale in the United States and the UK and the current exchanges between the US dollar and the British pound is one dollar for 1.5 pounds, it means that if the action cost $ 500 (USD) in the United States, it would have to cost £ 750 to consider two prices on the same or on the other.

Since the exchange rate between currencies can change rapidly, it takes time to determine the current PPP can be very important for purchases. For example, if a consumer founded in the USA found that the same suit was sold in the UK for £ 600, this would be essential savings on buying the same item in the US, where the price of $ 500 was. Assuming that transport costs were kept to a minimum, the American consumemer would benefit from ordering an action from the UK supplier, rather than a local purchase. If the exchange rate of the bill of exchange and the price of the British suit moved to £ 800, then the parity would move towards, which would make the purchase of a suit from a home supplier more cost -effective for this customer based in the US.

The approach, which tends to focus mainly on the current exchange rate, is called absolute PPP. The slightly different approach that is known as the relative PPP also takes into account other factors that can affect the benefits of purchasing international than domestic goods that are similar. With relative PPP, factors such as the inflation rate, which relates in every nation, will be part of the evaluation of retail prices for the goods considered. In addition, factors, such as business regulations between two nations, may, inherently, be more cost -effective than buying the same good in the domestic market.