relative purchase power parity meaning

An expansion of the purchase power parity theory suggesting that prices in countries vary for the same product but that they differ by the same proportional rate over time. The reasons suggested for this price difference include taxes, shipping costs and differences in product quality.


  1. Assuming the real interest rate is equal across two countries due to capital mobility, such that \ rho _ $ = \ rho _ c, substituting the aforementioned equation into the expectations form of relative purchasing power parity results in the formal equation for the international Fisher effect:

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PC Version