Relative Form PPP

See: Purchase Power Parity. See: Relative Purchase Power Parity.

Relative form purchase power parity, better known as relative purchase power parity, is regular purchase power parity (PPP) on steroids...dynamic steroids.

Regular PPP is a way to measure the exchange rate between two different currencies. PPP is when you take two identical goods and compare how much they cost under one currency, like the U.S. dollar. For instance, you can buy some $10 dumplings in the U.S., and buy almost identical dumplings in Thailand for 150 baht, or about $5 USD. Repeat this process with baskets of goods like transport, food, and healthcare, and you’re a PPP master.

Relative form PPP gives us even more information, since it takes the changing inflations of both currencies into account. If you take regular PPP at its word, you’re kind of ignoring inflation, or assuming that it’s the same in both currencies.
Take Venezuela for instance: the bolivar hyperinflated by 42,000% (that’s not a typo). If you took the PPP right before that happened, and right after, you’d get two very different numbers.

This is what relative form PPP avoids by taking inflation into account. It implies that, as inflation goes up, the value of that currency compared to the other goes down.

Let’s say you were able to buy coffee for 500 bolivars, and it now costs 220,000...yet over the same period of time in the U.S., coffee went from $2 to $2.15. Now, you need a lot more bolivars to equal every one U.S. dollar...over 100,000 bolivars instead of 250.