What is Purchasing Power Parity?

[Mika]

Money does not have the same value everywhere. The price of 1 cup of espresso in my home country is about $1.25, the same espresso will cost around $3.25 in the UK and $2.60 in the US. Things cost cheaper in my country, the items that I can buy for $1 in my country might not be available for the same price in other countries.

Purchasing Power Parity or PPP is the actual value of money, which is determined by the things it can buy. PPP tends to be higher in the developed world compared to developing countries. The kind of lifestyle you can buy for $5000 monthly income in the US can be bought for less than $5000 in most Asian and African countries.

Whether you want to travel to other countries or settle in a new country, try to understand the PPP of that country.

Understanding the PPP of your own country will also help you understand your finances if you are earning money in other currencies.

 

[Jasz]

Purchasing power parity (PPP) is a theoretical economic theory that seeks to explain the relative prices of goods and services in two different countries by taking into account the cost of living in both countries. It is a gross domestic product (GDP) measure for international economics.

The concept of purchasing power parity (PPP) was first developed in the late 1960s as an alternative to exchange rate theories that had been in use since the 1920s. The law of one price states that if two countries have similar prices, then their currencies should also be similar. For example, if France and Germany have similar prices, then they must also have similar currencies because they use the same currency to pay for goods and services.

In practice, it has been found that most countries have different exchange rates with respect to each other due to differences in inflation rates or consumer preferences for particular goods. To account for these differences, PPP measures are often used instead of exchange rates as a way to estimate how much one unit of currency buys in another country's economy.