Purchasing Power Parity (PPP)
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An economic theory and exchange-rate adjustment that equalizes the purchasing power of different currencies by accounting for the relative cost of a representative basket of goods.
## Purchasing Power Parity (PPP)
PPP adjusts currency exchange rates so that identical goods cost the same in every country. It is the gold standard for cross-country salary comparisons.
### Why Market Exchange Rates Are Misleading
A software engineer earning $60,000 in India lives much better than one earning $60,000 (at market exchange rates) suggests. PPP adjustment reveals that $60,000 in India has the purchasing power of approximately $180,000–$200,000 in the US.
### PPP Conversion Factors (2024, USD)
| Country | PPP Factor | $50K USD equivalent |
|---------|-----------|--------------------|
| US | 1.0 | $50,000 |
| India | 3.2 | ~$16,000 at market = $50K PPP |
| Poland | 1.8 | ~$28,000 at market = $50K PPP |
| Switzerland | 0.75 | ~$67,000 at market = $50K PPP |
### The Big Mac Index
The Economist's Big Mac Index is an informal PPP measure. It compares the price of a Big Mac across countries to estimate whether currencies are over/undervalued.