Financial
Purchasing Power Parity (PPP) implied FX rate & currency over/under-valuation
Compare an illustrative matched-basket price ratio with a spot rate and model an inflation-ratio scenario. These are not forecasts of fair market exchange rates.
Compare basket prices across borders with Absolute and Relative PPP
For the supplied hypothetical matched baskets, local price divided by dollar price gives 120 local currency units per dollar. Comparing 120 with the assumed spot 150 gives a minus20% basket-price deviation. That does not establish that the market currency is mispriced: taxes, nontradable costs, quality, trade barriers and capital flows can separate basket ratios from market rates.
Relative PPP is a scenario assumption: for a quote in local currency per dollar, multiply spot by the local price-growth factor divided by the dollar price-growth factor for the same period. It is not a reliable one-year spot forecast. The two-price exercise is not a full national purchasing-power-parity estimate.
| PPP Metric (Basket: 690 LCU vs $5.75 USD, Spot = 150 LCU/USD) | Formula | Result |
|---|---|---|
| Implied PPP Exchange Rate (LCU / USD) | 690 / 5.75 | 120.00 LCU / USD |
| Basket-based deviation | (S_PPP / S_spot) - 1 = (120 / 150) - 1 | -20.0% relative to this basket benchmark |
| One-year relative-PPP scenario | 150 * (1 + 0.02) / (1 + 0.05) | 145.71 LCU / USD |
Implied PPP exchange rate and currency over/under-valuation (%)
A2 and B2 are strictly positive prices of comparable baskets in local currency and dollars. C2 is positive local currency per dollar. A negative result is a basket-based deviation, not a trading signal.
=IF(OR(COUNT(A2:C2)<>3,MIN(A2:C2)<=0),"Invalid inputs",LET(ppp, A2 / B2, ROUND((ppp / C2) - 1, 4)))One-year relative-PPP scenario rate
D2=LocalInflation (0.02) and E2=USInflation (0.05).
=IF(OR(COUNT(C2:E2)<>3,C2<=0,D2<=-1,E2<=-1),"Invalid inputs",ROUND(C2 * (1 + D2) / (1 + E2), 2))Try the example
Use the original values or change them to test your understanding.