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  Purchasing Power Parity (PPP) Student: Elena Cristina BACIU, ISE   The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing  power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to  purchase.  Purchasing power  is the number of goods or services that can  be purchased with a unit of currency.   To measure purchasing power, you'd compare against price index such as CPI (consumer price index). A simple way to think about  purchasing power is to imagine if you made the same salary as your grandfather. Clearly you could survive on much less a few generations ago, however, because of inflation, you'd need a greater salary just to maintain the same quality of living. Purchasing power  ( sometimes retroactively called   adjusted for inflation)     A component of some economic theories and a technique used to determine the relative value of different currencies. CONCEPT:  The concept of purchasing power parity allows one to estimate what the exchange rate between two currencies would have to be in order for the exchange to be on par with the purchasing power of the two countries' currencies. Using that PPP rate for hypothetical currency conversions, a given amount of one currency thus has the same purchasing  power whether used directly to purchase a market basket of goods or used to convert at the PPP rate to the other currency and then purchase the market basket using that currency. Observed deviations of the exchange rate from  purchasing power parity are measured by deviations of the real exchange rate from its PPP value of 1.
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