Relative Purchase Power Parity
See: Purchase Power Parity.
You know that a Big Mac costs about $4 USD...but what if you bought that same Big Mac in Malaysia? Yes, they do exist there. Answer: it costs $2 USD. This is what purchasing power parity (PPP) is all about: a theoretical exchange rate derived by comparing the prices of goods in different countries using a one-currency lens.
Usually, though, individual goods (like our Big Macs) are not calculated. Rather, PPP is almost always used in a macroeconomic sense, so “baskets” of goods are measured and compared instead. Think: education, transport, food...you get the picture. You could even break it down to fast food vs groceries if you wanted.
Relative purchase PPP is just like PPP, except it takes into account inflation rates for the two countries as well. For instance, if the U.S. dollar had a really slowwww inflation rate, and the Malaysian ringgit had a really fast inflation rate, then taking the regular ol’ PPP in one snapshot of time would give you the wrong idea.
Let’s say the Malaysian ringgit was inflating quickly relative to the U.S. dollar. That would mean it costs more ringgits to buy the same Big Mac. Yet a Malaysian Big Mac would still theoretically cost $2 USD in the U.S. The Malaysian ringgit is being devalued compared to the U.S. dollar. It’ll take more and more Malaysian ringgits to buy the same value of U.S. stuff as ringgit inflation rises.
Relative purchase PPP, like regular PPP, is more useful in theory than in a right-now reality sense. That’s because it’s really hard to calculate the prices of all those goods. For instance, how would you calculate the PPP of an Indian rickshaw in U.S. dollars? A rickshaw isn’t a common item on the U.S. market, so calculating the PPP of it is getting super theoretical. Still, relative purchase PPP is more useful than regular old PPP when analyzing the exchange rates of currencies between nations. Since it takes inflation into account, it’s considered “dynamic.”
So...who’s up for a $2...er, a $4 Big Mac?