

Introduction
 Purchasing power parity theory which states that exchange
Rates between currencies in equilibrium when their
purchasing
Power is the same in each of the two countries.....
 The basis for ppp is the law of one price.
Purchasing power parities are the rates of currency conversion
That try to equalise the purchasing power of different
currencies
By eliminating the differences in price level between
countries .
 1.currencies are used to for purchasing goods and services
 2.value of a currency depends upon the quality of goods and
 Services that can be purchased by the currency
 3.thus,value of money is its purchasing power
 4.Exchange rate can also be mentioned on the
 Basis of This purchasing power
 5.Exchange rate is the expression of one
 Currency in terms of another currency.
1.suppose by using rs 60 we can purchase one kilogram orange
The purchasing power of rupees can be expressed as
Rs 60 =1kg orange .
2.Similarly for purchasing one kg orange ,we have to pay
One dollar ,the purchasing power of dollar can be expressed as
$ 1 =1kg orange
3.Now it is possible to state the exchange rates in terms of the
Value of orange
Rs 60=1kg orange =$ 1.
States the any commodity cannot command two different
Prices in two different markets. If so profits can be taken by
Trading between these two markets ultimately the difference
Will set off the price differentail and prices of two markets
Is equal.
*ppp theory was proposed by david richardo 19th century and popularized by
gustav cassel in 1920
*According to this theory exchange rate of a commodity is determined
On the basis of the purchasing power of currency .
 1.There exist perfect market condition
 2.absence of transportation costs from one market to another
 3.free trade across the international market.
 4.no barriers or controls over international trade like tariff, taxes ,
 Incentives ,promotion etc..
 5.no country is strong enough to influence the exchange rate
The absolute purchasing power parity theory predicts that
Price level will be the same across countries ,reacll that
The law of one price states that .the same products will
Have the same price level everywhere .....
Basically, it predicts that the cost of living across countries
Should be same.
Relative purchasing power parity is an economic theory that
states
That exchange rates and inflation rates in two countries
should
Equal out over over time.relative ppp is an extension of
absolute
Ppp in that it is a dynamic (as opposed to static).
It is a theory according to which the interest rate
differential between
Two countries is equal to the differentail between the
forword exchange
Rate and spot Exchange rate.
The theory of purchasing power parity holds that the
Prices of the same basket of goods should be the same
In all countries ,differing only by the cost of transportation
And any import duties
The ppp exchange rate is the rate at which the currency
Of one country would have to be converted in to that of another country
To buy the same amount of goods and services .
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