Eli5: What is Purchasing Power Parity?
In: Economics
Comparing different money values normalized to the purchase power, I.E. how much you can actually buy with it.
For example 1 USD is roughly 56 philippinian Pesos when traded at some currency exchange.
But if you want to compare a wage in the US versus the Philippines you have to consider that in the US rent and food is much more expensive, so at Purchase Power Parity it’s closer to 18 Pesos per dollar to afford the same standard of living
You live in Narnia and get paid 10 gold coins to run your adventurist potion store. A magic shroom costs 2 coins. You can get 5.
You move to Hobbiton for a potion sales job that pays 1000 silver coins. Shrooms cost 200 silver here. You can still get 5.
Narnia and Hobbiton have purchasing power parity.
You then move back to Narnia but a nicer neighbourhood. You get a job that now pays 20 gold coins. Shrooms in your nice digs cost 4 gold because you import them. You can get 5 shrooms still.
Both neighbourhoods have purchasing power parity.
Edit: spelling correction and typo
It’s an adjustment for how much goods and services cost in the country. GDP/average income can be unfair when you assess a country with a weaker currency.
Someone living on $500 might be able to pay off all their bills because the bills are different
PPP helps correlate how far various incomes go in different countries. Say average income in one country is $20k but only $5k in another. It would appear that the people in the first country are 4x better off since their income is 4x. But if rent, and bags of rice, and chickens, and doctors’ visits, etc. all cost 1/2 what they do in the wealthier country, then people in the poor country are only 2x worse off, not 4x worse off because their $5k buy them what would cost $10k in the wealthier country.
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