PPP - FDI - FII

Purchasing Power Parity (PPP):

• With increasing globalization, there is a need to measure and compare standards of living between countries, production of goods & services and their prices, showcase standard of living for foreign investors, traders, potential immigrants, etc..
• To compare money's value, exchange rate can be very useful. But it ignores the domestic economic sectors where prices are not fixed
• Purchasing Power Parity or PPP converts the local currency into a common currency and then compares the buying power of different countries (now it is on a common scale)
• PPP is a method of measuring the effective purchasing power of different countries' currencies over the same type of goods & services
• While comparing PPP of different countries, a standard single currency should be taken. Eg: US dollar; which gives an idea of what could be bought in that country

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII):

FDI and FII are both related to investments in a foreign country. Eg: US companies investing in the India, Indian companies investing in Singapore or China

Comparative points between FDI and FII:

1. FII is an investment made by an investor in the markets of a foreign nation whereas FDI is an investment by a parent company in a foreign country
2. FII is also known as 'hot money', as investors have the liberty to sell or take it back with them. A FII can enter and withdraw from the stock market easily whereas FDI cannot enter and exit that easily
3. On a comparitive scale, FDI is the more beneficial kind of foreign investment among the two
4. FII investment flows into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise whereas FDI only targets a specific enterprise, with an aim to increase the enterprise's capacity/productivity/management control. The capital flow is translated into additional production
5. Last but not least, FII are short-term investments whereas FDI are long-term investments