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Purples are quest items and yellow indicates crafted items, but for some silly reason that doesn't apply to TK/Dwarf crafted items (your guess is as good as mine).
In practice you've had at least 3 different teams working on the three games in the series, so there are green items that are better than blue, two blues that do the same thing have different stats (the older version is usually better) and blues that are better than quest rewards.
My guess is that CA didn't want to pay someone to do a balance/standardization pass on the items (time consuming for limited, if any, monetary return).
This is a mess, so purple is not always good I'm taken? And yellow is also alright could've been better?
They tend to give a lot of different bonuses or unique effects.
Blue are rare items that can drop from various actions and events. They are, usually, very powerful and specialized. The power of the item also depends a lot on what type of item it is(Talisman, Enchanted item etc), as some blues give a somewhat low bonus, but in an item slot that normally does not give any of such benefits(allowing you to specialize).
Yellow, in my experience, is crafted items only. They sit somewhere between Purple and Blue items, but usually have very specific or situational benefits. So the actual "value" or benefit of the item can be on the same level as a purple, or be lower than blue.
Like in any half-decent RPG, colour codes are only rough guidelines. You have to look at the actual stats and effects and consider if it is better for the character compared to a similar item of lower "tier".
But the power of items is all over the place and often doesn't reflect the rarity. E.g;
An uncommon Potion of Healing is vastly more useful than a rare Other Trickster's Shard.
Purple items are generally quite strong. The other thing to consider is that (usually) nobody else besides your LL can wear it. So let's say your LL is wearing a green armour, and then they get their unique purple armour, well that green armour is now available for someone else to use.
Just disregard the colour/rarity system and learn which stats and abilities are more useful than others.
Once you learn which items are relatively useless, you can fuse two of them into something useful. I routinely fuse things like Crown of Command and Scrolls of Leeching into better items.
Yellow varies from mediocre to borderline overpowered (Diamond Guardian Phoenix, which gives the entire army 10% physical resistance).
green=uncommon
blue=rare
purple= super rare and legendary items
yellow= OP super items
and the reason about the stats is cuz CA kinda threw them all over the place for some of them, id just use a mod to make it more aligned with rarity
the purple rarity coins cost like 10000 or so though obviously you wont have tons of the yellow items from them, blue coins make purple items and green make blue items, etc etc
as do some of the grey items....
Atleast on unmodded i know i'v taken crafted items from other players before after getting item steal from killing sigvald.