what does purchasing power parity mean?
In: Economics
Let’s say you go to a Walmart in the US and buy three items – a loaf of bread ($3), a pound of onions ($4) and a can of Coke ($10). Overall, it costs $17.
Let’s then say a family member of yours is in India. They want to buy the same three things, but are super broke. You decide to give them $17 but in Indian Rupees as that’s how much it cost you in the States.
Now, $1 is about 75 Indian Rupees. So, at their end, they receive 1,275 Rupees.
They head to a grocery store and buy the same three items. A loaf of bread (Rs. 25), a pound of onions (Rs. 15) and a can of Coke (Rs. 40), for a grand total of Rs. 80 or $1.07.
So, with $1 and change, your family member in India could buy what cost you $17.
In other words, all other things being equal, $17 in USA is the same as $1 in India. The purchasing power parity of an Indian Rupee, with respect to the US Dollar, is 17.
Now the problem is that different items would have different levels of parity. A Samsung Galaxy S21 would be more expensive in India, than it is in USA.
So, to give people a general idea of parity levels, economists choose a large group of items that are frequently bought in both places, add them to their carts, and provide a ‘PPP’ value based on how much the same cart cost in each country.
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