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Comparing Nations PPP
A meaningful comparison of prices across countries requires a wide range of goods and services. To facilitate this University of Pennsylvania and UN joined forces to establish International Comparison Program.
PPPs generated by the ICP have a basis from a worldwide price survey that compares the prices of hundreds of various goods and services. The program helps international macroeconomists estimate global productivity and growth.
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What is PPP ?
PPP is an economic theory that compares different countries' currencies through a "basket of goods" approach.
According to this concept, two currencies are in equilibrium or considered being at par—when a basket of goods is priced the same ...
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What is it used for ?
PPP as a theoretical exchange rate allows you to buy the same amount of goods and services in every country.
Eg: If you want to live inexpensively and you can move to any country in the world, compare the prices of McDonald's Big Mac.
Government agencies use it to com...
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Impact of PPP
The World Bank releases a report that compares the productivity and growth of various countries in terms of PPP and U.S. dollars.
The International Monetary Fund and the Organization for Economic Cooperation and Development use weights based on PPP metrics to make predictions and recommend...
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Pairing PPP vs GDP
Accounting GDP for PPP value.
This adjustment attempts to convert nominal GDP into a number more easily comparable between countries with different currencies.
To better understand, suppose it costs $10 to buy a shirt in the U.S., and it costs €8.00 to buy an identical shirt in German...
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Drawbacks of PPP
Some factors explain why PPP is not a good reflection of reality.
- Tax differences: Government sales taxes such as the value-added tax (VAT) can spike prices in one country, relative to another
- Government Intervention: Tariffs can dramatically a...
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Calculating PPP?
The relative version of PPP is calculated as
S=P1/P2
S= Exchange rate of currency 1 to currency 2
P1 = Cost of good X in currency 1
P2 = Cost of good
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