1. What is Purchasing Power Parity?

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. It measures how much a currency can buy in terms of an international standard.

2. How Does the Calculator Work?

The calculator uses the PPP formula:

Where:

• Cost of Basket Local — Price of goods in local currency
• Cost of Basket Reference — Price of same goods in reference currency

Explanation: PPP compares the cost of identical goods and services between countries to determine the relative value of currencies.

3. Importance of PPP Calculation

Details: PPP is crucial for economic comparisons between countries, adjusting GDP figures, and understanding real exchange rates beyond nominal values.

4. Using the Calculator

Tips: Enter the cost of an identical basket of goods in both local and reference currencies. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between PPP and exchange rate?
A: Exchange rates reflect currency values in foreign exchange markets, while PPP reflects the actual purchasing power of currencies.

Q2: What is a typical basket of goods for PPP?
A: It typically includes food, clothing, housing, transportation, healthcare, and other common expenses.

Q3: Why is PPP important for economists?
A: It allows for more accurate international comparisons of income, productivity, and living standards.

Q4: What are limitations of PPP?
A: It assumes goods are identical across countries, ignores local preferences, and may not account for quality differences.

Q5: How often is PPP updated?
A: Major organizations like the World Bank update PPP data every few years as part of their International Comparison Program.