Date: March 08, 2015


What is ‘PURCHASING POWER PARITY’ what is its significance and how it is calculated? [200 WORDS]


It is a technique used to determine the relative value of different currencies. The theory aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other.

Calculation of PPP-

The simplest way to calculate purchasing power parity between two countries is to compare the price of a “standard” good that is in fact identical across countries. Every year The Economist magazine publishes a light-hearted version of PPP: its “Hamburger Index” that compares the price of a McDonald’s hamburger around the world. More sophisticated versions of PPP look at a large number of goods and services. One of the key problems is that people in different countries consumer very different sets of goods and services, making it difficult to compare the purchasing power between countries.


Significance of PPP- PPP is used worldwide to compare the income levels in different countries. PPP thus makes it easy to understand and interpret the data of each country.