Price level and purchasing power of currency(PPP) This could be a silly question, but I'm a bit confused with this concept.
Don't we say usually the purchasing power(or value) of currency(or money) is low when the price level is high in one country(i.e. negative relationship)?
However, in international economics, it looks like a country's price level has postive relation to purchasing power of it's own currency.
For example, the prices of United States are higher than that of Korea and at the same time, the purchasing power of dollar is higher than Korean won.
How can I understand this kind of contradiction?
Prices in themselves don't mean much when you want to predict purchasing power.
Imagine a loaf of bread costs 100 of country A's monetary units in country A, while it costs 2 of country B's monetary units in country B. This does not tell you anything about purchasing power because you do not know if you could buy a loaf of bread for 100 of country A's monetary units in country B or vice versa.
You also need to consider the currency A to currency B exchange rate, usually denoted by $E_{B/A}$. Then purchasing power/real exchange rate is calculated by
$$
\frac{P_A}{P_B} \cdot E_{B/A} ,
$$
where $P_A$ and $P_B$ are price levels in countries A and B respectively. If this is larger than 1, then using country A's currency one could buy more goods in country B than in country A, while if it is smaller than 1 then the reverse is true.