What Is Purchasing Power Parity(PPP)? | UPSC Economics

Purchasing Power Parity is one of the popular macroeconomic analysis metrics to compare economic productivity and standards of living between the countries. Today we will discuss in detail the Purchasing Power Parity and its Formula as well.

Purchasing Power Parity is an economic theory that compares different countries’ currencies through a basket of goods approach. Every three years, the world bank releases a report that compares various countries, in terms of PPP and U.S. Dollars. Organizations like International Monetary Fund and Organization for Economic cooperation and development use weights based on PPP metrics to make economic policies.

In the whole world, five nations have the highest GDP in terms of market exchange terms and they are the United States, China, India, Japan, and Germany.

In simple terms, the idea behind the Purchasing Power Parity is that the exchange rate of the countries should be on par with each other so that the consumers can buy the same amount of goods and products for the same price across the globe.

The Purchasing Power Parity formula is expressed like this

S= P1/P2; Here S1 means the exchange rate of Currency 1 and Currency 2. P1 means the cost of a good in currency 1 and P2 means the cost of the same good in currency 2.

To make this even simpler, we can take the example of a high-end laptop. You must compare the value of the output from different countries. The price of the HP Pavillion laptop is Rs 36,990/- in India. In the US, it should cost you around $460 or above. Because the exchange rate is considered as 79.40Indian rupees for $1. So this will help the economists to determine the productivity and living standards of a country.

It is an important concept in economics for calculating the purchasing power of a nation’s currency and also helps to understand the standard of living in various other countries.

Also Read

• The Relationship Between Rocks and Landforms | UPSC Geography
• Role of Constitutional and Extra-Constitutional Bodies in Law Making | UPSC Polity

Follow Us For More Content On:

https://www.instagram.com/topperment/

https://www.facebook.com/TopperMent

https://www.youtube.com/@topperment