# What exactly is the difference between the PPP (“purchasing power parity”) and LOOP (“law of one price”)?

For PPP & LOOP: e = EP/P* = 1 So both are valid if goods in the US and EU cost the same in $for example. But then, what exactly is the difference between both? ## 1 Answer PPP uses the price level, the price of the consumer basket. The price level can be identical without all prices being identical. An example: Consider a consumer basket with just two goods and assume the weight of both goods in the basket is one half. If$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.

• So as consequence: LOOP requires identical prices and price level and PPP just identical price levels? – visionInc Oct 28 '16 at 17:20
• @visionInc Factoring in the exchange rate, yes. – Giskard Oct 29 '16 at 7:03