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 calculates the exchange rate at which one currency would need to be converted into another to buy the same amount of goods and services in both countries.

2. How Does the Calculator Work?

The calculator uses the PPP formula:

Where:

• \( Price_{domestic} \) — Price of goods in domestic currency
• \( Price_{foreign} \) — Price of identical goods in foreign currency

Explanation: The ratio shows how many units of domestic currency are needed to purchase the same goods that one unit of foreign currency can buy.

3. Importance of PPP Calculation

Details: PPP is crucial for comparing economic productivity and standards of living between countries. It helps economists make more accurate international comparisons by eliminating price level differences.

4. Using the Calculator

Tips: Enter the price of identical goods in both domestic and foreign currencies. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between PPP and exchange rate?
A: Exchange rate is the market price of one currency in terms of another, while PPP is the theoretical exchange rate that would make purchasing power equal.

Q2: Why is PPP important in economics?
A: PPP allows for more accurate comparisons of economic data between countries by accounting for differences in price levels.

Q3: What is the "Big Mac Index"?
A: It's an informal way to measure PPP using the price of a Big Mac burger across different countries as the standardized "basket of goods."

Q4: Does PPP hold true in reality?
A: PPP tends to hold better in the long run than in the short run, as many factors can cause deviations from PPP in the short term.

Q5: Can PPP be used for investment decisions?
A: While PPP provides useful information about currency valuation, investors should consider multiple factors when making investment decisions.