Purchasing power parity is economic technique used to determine relative value of two different currencies. PPP is often used to forecast future exchange rates for purposes ranging from deciding on the currency denomination of long-term debt issues to determining in which countries to build plants. It also states that home currency in this case we would assume United States should have the same purchasing power around the world. Example that is used in all major text book is Big Mac which currently sells in 120 countries. For example, if a Big Mac costs $3 in the US, and 9,000 riel in Cambodia, we can determine that the exchange rate is $1 for 3,000 riel. We would then use this indexed exchange rate to determine relative value of other items. The relative version of PPP, which is used more commonly now states that the exchange rate between the home currency and any foreign currency will adjust to reflect changes in the price levels of the two countries. For example, if inflation is 5% in the Unites States and 1% in Japan, then the dollar value of the Japanese yen must rise by about 4% to equalize the dollar price of goods in the two countries. Purchasing power parity states very important message which is you can’t compare price of goods in one year to price of good in another year without calculating inflation for that time. When you compare two different exchange rate the reality states that they have different inflation rate. When you are calculating the formula which is used is where St is the spot rate in Foreign Currency/Domestic Currency and Pt is the price level in period t (foreign values are marked by an asterisk). This relation is necessary but not sufficient for purchasing power parity.  http://en.wikipedia.org/wiki/Purchasing_power_parityhttp://www.wisegeek.com/what-is-purchasing-power-parity.htm