Compare and contrast the absolute and relative versions of the Purchasing Power Parity (PPP) principle, and evaluate the principle's practical usefulness.Defining Power Parity Purchasing PolicyPPP is an economic theory that states that the price of common goods between two different countries compared should be equal when converted into a common currency. The PPP ratio presents two identical countries or a group of products with a relative price level difference. The basis of the PPP is the “law of one price”. The law of one price simply states that, in the presence of a competitive market structure and in the absence of transportation costs and other trade barriers, identical products sold in different markets will be sold at the same price when expressed in terms of the common currency (Keith Pilbeam fourth edition, p.126). The law is mathematically expressed as follows: PAFN = E x PRs In the above formula PAFN is the price of the product in Afghani, PRS is the price of the product in Pakistani rupees and E is the exchange rate between Afghani and Pakistani rupees. For example, if the price of an identical TV in Afghanistan is 1000 AFN and it costs 2000 rupees in Pakistan, then according to the law of price the exchange rate should be 0.5, and if the exchange rate was higher, that is 0.6 , Pakistani trader will start buying TV from Afghanistan and trade it with Pakistan as arbitrage profit opportunity arises and traders will continue to trade for profit by selling Pakistani Rupees and buying Afghanis resulting in increased demand of Afghani and leads to depreciation of Pakistani Rupees, this will continue until the point where arbitrage profit opportunities are eliminated, market forces of supply and demand take hold and the price c......half of paper... ...omic event that is sudden and causes a relative change in the price level. Studies have found that relative PPP is better in the long run than in the short run. In general, studies persist that PPP is not an exchange rate theory since the exchange rate is variable based on factors other than price. Price and exchange rate are endogenous variables. Purchasing power parity used in three concepts to explain identical goods should cost the same in two different countries when converted into the common currency. The law of one price links the exchange rate to the price of individual goods. Absolute PPP relates the exchange rate to the general price level, and relative PPP relates the exchange rate to the inflation rate. Reference Author's SURNAME, INITIALS, Year of publication. Title. Edition (if not the first). Place of publication: Publisher. Reference to web pages/sites and e-books/e-journals