The Two Terms Purchasing Power Parity (PPP) and Relative Purchasing

question 19

Essay

The two terms Purchasing Power Parity (PPP) and Relative Purchasing Power Parity (RPPP) are similar but not synonymous. Explain these two, their differences and why differences in exchange rates in the market may vary from the values implied by PPP or RPPP.

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Definitions:

Crossover Rate

The point at which two or more projects have the same net present value or rate of return, used in capital budgeting to compare projects.

Mutually Exclusive

Situations or events that cannot occur at the same time, often referring to investment choices or project decisions in finance.

Required Rate

The minimum return an investor expects to achieve by investing in a project, often used as a benchmark to assess its viability.

Average Accounting Return

The average accounting return is a financial ratio that measures the profitability of an investment as the average net income the investment generates divided by the book value of the investment's initial cost.