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.
Related or Semi-related Video
Econ: What is General Price Level?4 Views
And finance Allah shmoop What is general price level You
go to the sort of by your usual weekly staples
canned chili caramel dip frozen bananas pickled kiwi Ryan's and
replacement anima tubes Every week you buy the same things
weekend week out Your grocery cart has the same four
items It's been like this for years Same stuff every
week You're a creature of habit And yes you have
those digestive problems that you might want to check out
But that's for another video OK overtime prices for the
individual items move in all different directions Prices for some
of the items might go up while prices for others
might go down even when everything moves in the same
direction While the prices don't change at the same rate
some see big jumps in price Some barely see moves
at all For instance in the past year the price
of a can of chili rose from a buck forty
six to a buck forty nine an increase of about
two percent No big deal however Pickled kiwi rinds have
jumped to seven dollars Sixty nine cents from seven dollars
nine cents an increase of nearly eight and a half
percent Yeah much bigger deal Meanwhile the price of anima
tube's actually fell during the year leaking or dipping to
six dollars forty nine cents from six seventy four Well
those air individual price levels But what about general price
levels Will the general price level is a measure of
prices across an entire system not just the direction of
a price the direction of all prices You know general
prices Right So this week all the items in your
grocery cart cost you twenty dollars Two cents That's your
general price level If you want to make an economic
indicator out of it well call it your personal general
price indicator or PGP I once you know the general
price level while you contract overall price changes over time
So a year ago the four items that you buy
every week totaled nineteen dollars Forty two cents This year
Twenty dollars two cents Your PGP I rose three point
one percent from last year And there's a map new
minus old overalls that you get that percent growth formula
thinking well In real life he's general price levels are
used to track inflation or deflation though well it doesn't
happen all that often deflating things People like to rattle
off inflation stats but it's actually a tricky thing to
really track Honestly you're fairly er accurately in a complex
economy prices for various products are moving in different directions
all the time and a different rates all the time
Combining all this action into a single stat well is
extremely complicated There are a lot of competing indicators that
measure the general price levels in the overall economy The
most high profile of these is the Consumer Price index
or CP I It works like the total price is
for your weekly grocery basket except that the CP I
includes a big basket like a basket with a representative
sample off of all the stuff people by at least
all the stuff that CPS measures And it's like thousands
of things Your personal consumer price index may include just
those four items that you buy every week You know
the basket where one in four of the items are
enema tube But the C P I R consumer price
index is a lot broader thousands of items that people
die all the time or in that index So yeah
enema to prices make up well hopefully far less than 00:03:13.87 --> [endTime] twenty five percent of that index What
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What is the Producer Price Index (PPI)? The Producer Price Index is a composite of thousands of price indexes from sellers of of goods and services...