What Is Relative Purchasing Power Parity?

Relative Purchasing Power Parity (Relative Purchasing Power Parity; Relative PPP) is an economic theory proposed by Kassel in 1918 when he analyzed the relationship between inflation and exchange rate changes during the First World War. The theory of relative purchasing power parity emphasizes that the difference in the rate of inflation between spot and forward must be equal to the difference in exchange rates during this period.

Relative purchasing power parity

If they do nt agree,

The meaning of relative purchasing power parity is that the appreciation and depreciation of the exchange rate is determined by the difference between the inflation rates of the two countries. Take China and the United States as an example. If China s inflation rate exceeds that of the United States, the yuan will depreciate, otherwise the yuan will appreciate. According to the research by Yi Gang and Fan Min, from 1980 to 1996, except for 1980 to 1984 and 1990 to 1991, the U.S. inflation rate was higher than China's inflation rate. In other years, China's inflation rate was high. In the United States. When the inflation rate in the United States is higher than the inflation rate in China, the RMB exchange rate did not appreciate as the theory of relative purchasing power parity said, but depreciated. In the year of RMB appreciation, China's inflation rate is higher than the US inflation rate. It can be seen that the RMB exchange rate and purchasing power parity are divergent, and the relationship between the changes in inflation rates and exchange rates in China and the United States does not conform to the theory of relative purchasing power parity. ^[1]