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Compare and contrast interest rate parity and purchasing power parity.

Compare and contrast interest rate parity and purchasing power parity.

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1. Interest rate parity will be taking into account the interest rate which are different in different countries Whereas purchasing power parity will be considering change in inflation rate over a period of time

2. interest rate parity advocates that interest rate differential will be equal to the forward rate premium whereas purchasing power parity advocates that price of goods and services will be equal after adjustment for the inflation.

3. Interest rate parity is based upon the forward rate premium where as purchasing power parity is based upon spot rate.

4. interest rate parity will be considering the interest rate differential where as purchasing power parity will be considering the percentage change in the spot rates.

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