Good Example Of Essay On There Are Three Forms Of Purchasing Power Parity (Ppp) Are:

Absolute PPP states that price levels adjusted for exchange rates are equal between countries, so the spot exchange rate of two countries’ currencies is identical to the ratio of the price levels for those two countries:
S= P1P2, where

S is the spot exchange rate between currency 1 and currency 2;

P1 is the price index for country 1;
P2 is the price index for country 2.
Relative PPP states that exchange rates of two countries’ currencies will adjust over a period of time to the relative change in price levels of those two countries:
StS0 = (1+I1)(1+I2), where

S0 is the spot exchange rate at the beginning of the period;

St is the spot exchange rate at the end of the period;
I1 is the expected annualized inflation rate for country 1;
I2 is the expected annualized inflation rate for country 2.
Real Effective Exchange Rate is the nominal exchange rate adjusted for a country’s inflation rate. PPP states that if exchange rates are adjusted to inflation differential, the real effective exchange rates will stay the same.
er=enC1C2, where
er is the real exchange rate for currency 1;
en is the nominal exchange rate for currency 1;

C1 is currency 1 cost;

I2 is currency 2 cost.
The Law of One Price is the basis of the PPP concept. It states that a certain good/service must be sold for the same price in all locations when exchange rate is taken into consideration:
P1=P2*S , where

P1 is the price of the good/service in country 1;

P2 is the price of the good/service in country 2;
S is the spot exchange rate between currency 1 and currency 2.