What are the two types of purchasing power parity theory

The theory of purchasing power parity includes: absolute purchasing power parity, relative purchasing power parity.

1. Absolute purchasing power parity means that the price of the same commodity in two different countries is equal after the currency exchange rates of the two countries are adjusted. That is to say, if the price of the same commodity in two countries is the same after the exchange rate adjustment of the two countries, then the purchasing power of these two countries is absolute parity.

2, the relative parity of purchasing power refers to the price of the same basket of commodities in two different countries, the same price in two countries after the adjustment of the currency exchange rate. In other words, if the total price of the same basket of goods in the two countries is the same after the exchange rate adjustment of the two countries, then the purchasing power of these two countries is relative parity.

Analysis and evaluation of the theory of purchasing power parity:

1. The theoretical basis of purchasing power parity is the quantity of money: the money supply determines the purchasing power of a unit of money, and the reciprocal of the purchasing power of money is the level of prices, so the PPP believes that the quantity of money determines the purchasing power of money and the level of prices, which in turn determines the exchange rate.

The PPP is the analysis of the monetary level factors. is the representative of analyzing the exchange rate problem from the monetary level factor.

2, purchasing power parity is the most influential exchange rate theory. This is because: it is the basic function of money (with purchasing power) to analyze the exchange of money, logical, easy to understand, the simplest form of expression, the exchange rate decision of such a complex problem gives the most concise description.

3, purchasing power parity involves a series of issues are very basic in the exchange rate decision, at the core of exchange rate theory.