Purchasing power parity

In economics, purchasing power parity (PPP) is a method used to calculate an alternative exchange rate between the currencies of two countries. The PPP measures how much a currency can buy in terms of an international measure (usually dollars), since goods and services have different prices in some countries than in others.

PPP: clarification and discussion

Main article: Discussion and clarification of PPP

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The main reasons why PPP does not perfectly reflect standards of living are

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• PPP numbers can vary with the specific basket of goods used, making it a rough estimate.
• Preferences and choices can vary from country to country. Goods then differ in their contribution to welfare.
• International competitiveness is mainly affected by the exchange rate and not by PPP.
• Differences in quality of goods are not sufficiently reflected in PPP.

PPP calculations are often used to measure poverty rates. For problems with this methodology, see How Not To Count The Poor.

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