Relative Purchasing Power Parity (RPPP) is an extension to incorporate increases in inflation over time of the conventional purchasing power parity (PPP) principle. Purchasing power is the power of money represented by the sum of goods or services that can be bought by one unit, which can be decreased by inflation. RPPP indicates that there would be a devalued currency in countries with higher inflation rates.

The disparity between the rates of inflation of the two countries and the cost of commodities would drive changes in the exchange rate between the two countries, according to relative purchasing power parity (RPPP). RPPP draws on the concept of parity of purchasing power and complements the principle of parity of absolute purchasing power (APPP). The definition of the APPP notes that for those two countries, the exchange rate between the two nations would be equal to the ratio of price levels.

Purchasing Power in Theory

Purchasing power parity (PPP) is the principle that if their exchange rate is applied, commodities in one country will cost the same in another country. According to this principle, when a commodity basket of goods is priced the same in both nations, two currencies are at equal. The PPP rate will be calculated by the comparison of prices of similar goods in different countries. However, due to variations in product quality, customer attitudes, and economic conditions in each country, it is difficult to make an exact comparison. Purchasing power parity is also a theoretical principle that may not be valid, especially in the short run, in the real world.