2. Relative purchasing power parity According to the law of one price, after adjusting for exchange rates, identical products should sell for same price in all countries This relationship states that the percentage change in the future spot exchange rates between two currencies will be equal to the difference in the inflation rates between two countries. This form of law of one price is called Absolute purchasing power party Relative purchasing power party Suppose you need to forecast the one-year forward rate between the euro and the U.S. dollar. Based on your research, you expect inflation in the eurozone to be 2.0% next year, whereas inflation in the United States is expected to remain at 1.0% in the coming year. The current spot rate between the two regions can be represented as $ 10.68743. (Note: Do not round intermediate calculation.) Based on the information you have your estimate of the one year future spot rate-if you consider the United States as your home country is Therefore, the higher inflation rate in the eurozone can be expected to lead to a decline in the future spot value of the euro relative to the dollar by The relative purchasing power party is considered to be generally more useful for predicting movements in foreign exchange rates on a Long-term basis O Short-term basis Grade It Now Save & Continue Continue without having