What is Purchasing Power Parity?
PPP Calculator, Purchasing power parity or PPP is a theory used to adjust currency exchange rates such that they can be compared against each other to determine their purchasing power. Simply put, if you buy a similar commodity using either of the currencies, the expense incurred should be the same in both currencies if the exchange rate is considered.
Purchasing Power Parity Converter
Convert your salary from one currency to another currency.
You require a salary of _______ in ‘s local currency to live a similar quality of life as you would with a salary of _______ in ‘s local currency.
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PPP Calculator Why We Use It ?
Purchasing power parity is used across the globe to estimate and compare income levels across countries. It helps us understand and interpret the currencies and cost structures of each country.
For instance, let’s say that a dress from Zara costs Rs. 5,000 in India. We would expect the dress to cost around $60 in the USA considering the ongoing exchange rate of 80 between the US dollar and the rupee.
PPP Thoery Really Reliable ?
PPP does not necessarily give a clear picture of the standard of living of countries. Here’s why:
- PPP involves many assumptions regarding consumption patterns and associated price levels.
- Constructing baskets of identical goods and services may be a challenge, especially if comparing dissimilar countries. This is because people may have different preferences and the quality of the offerings may differ accordingly.
- Traded goods do not necessarily trade at equal price levels since there may be cross-border restrictions. This may result in a deviation from PPP.
PPP Calculator Uses
- Economists use the concept of PPP to compare and draw parallels between the economic outputs of different countries.
- It is also used in combination with GDP measures to determine the economic health of countries.
- PPP helps traders and investors who deal in foreign currency. It can be used to estimate the strength or weakness of a currency.
- In some cases, it can also be used to determine exchange rates for new economies and forecast future exchange rates.