Relative and absolute purchasing power parity

Question

Explain about the purchasing power parity, both the relative and absolute versions. List the things which results in the deviations from purchasing power parity?

Answer 1

Absolute version of the purchasing power parity (PPP) is:

          S = P$/P£.

Relative version is:

          e = ∏$ - ∏£.

PPP will be violated in case there exist some barriers for international trade or if people in various countries have diverse consumption taste. PPP is the law of one price which is applied to the standard consumption basket.