<p>PPP uses the price level, the price of the consumer basket. The price level can be identical without all prices being identical. An example:</p>

<p>Consider a consumer basket with just two goods and assume the weight of both goods in the basket is one half. If $p_1 = p_2 = 4$ then the price of the consumer basket is
$$
P = \frac{1}{2} \cdot p_1 + \frac{1}{2} \cdot p_2 = 4.
$$
However you get the same price level if you have $p_1 = 3,  p_2 = 5$.</p>

<p>So you can have two countries with identical price levels but differing prices. The converse of course is not possible. Thus LOOP implies PPP but PPP does not imply LOOP.</p>

CC BY-SA 3.0
2016-10-28T17:20:09.273Z
So as consequence:
LOOP requires identical prices and price level and PPP just identical price levels?
visionInc
CC BY-SA 3.0
2016-10-29T07:03:22.317Z
@visionInc Factoring in the exchange rate, yes.
Giskard
CC BY-SA 3.0
2016-10-28T11:43:12.990Z
2016-10-28T11:50:42.370Z
2016-10-28T11:50:42.370Z
Giskard
<p>For PPP &amp; LOOP: e = EP/P* = 1
So both are valid if goods in the US and EU cost the same in $ for example.
But then, what exactly is the difference between both?</p>

<macroeconomics><exchange-rates><purchasing-power-partity>
What exactly is the difference between the PPP ("purchasing power parity") and LOOP ("law of one price")?
visionInc
# What exactly is the difference between the PPP ("purchasing power parity") and LOOP ("law of one price")?

(Asked by: username_0 on 2016-10-28)

For PPP & LOOP: e = EP/P\* = 1
So both are valid if goods in the US and EU cost the same in $ for example.
But then, what exactly is the difference between both?

**Tags:** macroeconomics, exchange-rates, purchasing-power-partity


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## 1 answers

### Answer by username_1 on 2016-10-28. Score: 1 | Accepted answer

PPP uses the price level, the price of the consumer basket. The price level can be identical without all prices being identical. An example:

Consider a consumer basket with just two goods and assume the weight of both goods in the basket is one half. If $p\_1 = p\_2 = 4$ then the price of the consumer basket is
$$
P = \frac{1}{2} \cdot p\_1 + \frac{1}{2} \cdot p\_2 = 4.
$$
However you get the same price level if you have $p\_1 = 3, p\_2 = 5$.

So you can have two countries with identical price levels but differing prices. The converse of course is not possible. Thus LOOP implies PPP but PPP does not imply LOOP.

> **Comments:**
> **username_0**: So as consequence: LOOP requires identical prices and price level and PPP just identical price levels?  
> **username_1**: @username_0 Factoring in the exchange rate, yes.  

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