1. What is Purchasing Power Parity (PPP)?

Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. It measures the price differences between cities or countries for the same goods and services.

2. How Does the Calculator Work?

The calculator uses the PPP equation:

Where:

• \( Local\ Price \) — Price of item/service in local currency
• \( Reference\ Price \) — Price of same item/service in reference currency

Explanation: The equation calculates how many units of a local currency are needed to buy the same goods/services as one unit of the reference currency.

3. Importance of PPP Calculation

Details: PPP is crucial for comparing economic productivity and standards of living between countries, adjusting GDP comparisons, and understanding relative price levels.

4. Using the Calculator

Tips: Enter local price and reference price in their respective currencies. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What does a PPP index of 100 mean?
A: An index of 100 means prices are equal between the local and reference locations. Below 100 means cheaper, above means more expensive.

Q2: What's the most common reference currency?
A: The US dollar is most commonly used as the reference currency for international PPP comparisons.

Q3: How often should PPP be calculated?
A: For accurate comparisons, PPP should use recent price data as exchange rates and local prices fluctuate.

Q4: What are limitations of PPP?
A: PPP doesn't account for quality differences, local preferences, or non-traded services. It's best for broad comparisons.

Q5: Where is PPP commonly used?
A: Economists use PPP for GDP comparisons, international organizations use it for poverty analysis, and businesses use it for market entry decisions.