Purchasing Power Parity

Extracted Attributes

• Field

  Economics / Macroeconomics

• Common Unit

  Geary-Khamis dollar (International dollar)

• Limitations

  Does not account for non-tradable goods (e.g., housing), transaction costs, tariffs, or trade barriers

• Theoretical Basis

  Law of One Price

• Primary Applications

  Comparing GDP, labor productivity, individual consumption, and cost of living

• OECD Calculation Components

  3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods, and 15 construction projects

• 2003 Conversion Rate (China)

  1 Geary-Khamis dollar was equivalent to approximately 1.8 Chinese yuan

Timeline

• The World Bank's World Development Indicators estimated that one Geary-Khamis dollar was equivalent to about 1.8 Chinese yuan by PPP. (Source: Wikipedia)

  2003-12-31

• Reference year for the International Comparison Program (ICP) data covering 199 economies. (Source: World Bank ICP Report)

  2011-12-31

• Release of the ICP results for the 2011 reference year, providing in-depth analysis of the structure of the world economy. (Source: World Bank ICP Report)

  2014-04-01

• During Episode 144 of the All-In Podcast, David Sacks presents data showing that the expanded BRICS nations now surpass the G7 in terms of Purchasing Power Parity. (Source: All-In Podcast Episode 144)

  2023-08-31

Purchasing power parity

Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries' currencies. PPP is effectively the ratio of the price of a market basket at one location divided by the price of the basket of goods at a different location. The PPP inflation and exchange rate may differ from the market exchange rate because of tariffs and other transaction costs. The purchasing power parity indicator can be used to compare economies regarding their gross domestic product (GDP), labour productivity and actual individual consumption, and in some cases to analyse price convergence and to compare the cost of living between places. The calculation of the PPP, according to the OECD, is made through a basket of goods that contains a "final product list [that] covers around 3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects".

Web Search Results

• Purchasing power parity - Wikipedia

  ## Concept [edit] Purchasing power parity (PPP) is an economic term for measuring prices at different locations. It is based on the law of one price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location. Ideally, a computer in New York and in Hong Kong should have the same price. If its price is 500 US dollars in New York and the same computer costs 2000 HK dollars in Hong Kong, PPP theory says the exchange rate should be 4 HK dollars for every 1 US dollar. [...] There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates. A well-known purchasing power adjustment is the Geary–Khamis dollar (the GK dollar or international dollar). The World Bank's World Development Indicators 2005 estimated that in 2003, one Geary–Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity—considerably different from the nominal exchange rate. This discrepancy has large implications; for instance, when converted via the nominal exchange rates, GDP per capita_per_capita "List of countries by GDP (nominal) per capita") in India is about US$1,965 while on a PPP basis, it is about Int$7,197. At the other extreme, Denmark's nominal GDP per capita is around US$53,242, but its PPP figure is [...] should purchase the same goods as a dollar in Chicago, which is certainly not the case.

• Purchasing Power Parity (PPP) | Topics | Economics - Tutor2u

  For example, if a basket of goods costs $100 in the United States and the same basket costs £75 in the UK, the PPP exchange rate would be 1 USD = 0.75 GBP, assuming no distortions like taxes or transportation costs. 2. PPP Exchange Rate: The PPP exchange rate is the exchange rate at which the same goods or services would cost the same in two different countries. It helps to compare different countries' economic output (GDP) in a common currency, often the US dollar. [...] 3. Adjustment for Living Standards: By adjusting for differences in price levels, PPP allows economists to make better comparisons of living standards and real output across countries. For instance, even if two countries have the same nominal GDP, their PPP-adjusted GDP might differ significantly if one country has much lower prices for goods and services.

• [PDF] Purchasing Power Parities - The World Bank

  Due to large differences in price levels across economies, market exchange rate- converted GDP does not accurately measure the relative sizes of economies and the levels of material well-being. PPPs make it possible to compare the output of economies and the welfare of their inhabitants in ‘real’ terms, thus controlling for price level differences across countries. The preceding table lists 12 economies with the largest share of world GDP in PPP terms, and the corresponding shares using market exchange rates in 2011. For example, if market exchange rates were used in converting GDP, India would be ranked 9th or 10th in the share of world GDP. When PPPs are used instead, it is ranked third, which is a more accurate reflection of its share of world GDP. What are PPP Data Requirements? [...] PPPs measure the total amount of goods and services that a single unit of a country’s currency can buy in another country. The PPP between countries A and B measures the amount of country A’s currency required to purchase a basket of goods and ser­ vices in country A as compared to the amount of country B’s currency to purchase a similar basket of goods and services in country B. PPPs can thus be used to convert the cost of a basket of goods and service into a common currency while eliminating price level differences across countries. In other words, PPPs equalize the purchasing power of currencies. [...] The most recent ICP results covering 199 economies were released in April 2014 for the reference year of 2011. ICP results and their in-depth analysis help to better understand the structure of the world economy. For example, the following chart shows the relationship between the PPP-based real GDP per capita and cumulative share of the global population. The full set of results are available at - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 - 10 20 30 40 50 60 70 80 90 100 Real GDP per capita (USD) Cumulative share of global population (%) United States Germany Japan Russian Fed. Mexico Brazil South Africa Egypt, Arab. Rep. China India Bangladesh Nigeria Ethiopia World average 13,460 Source: ICP,

• [PDF] Purchasing-Power Parity: Definition, Measurement, and Interpretation

  Because . . . PPP exchange rates reflect differences in the national prices of both non-traded and traded goods, they are very useful for international comparisons of standards of living. In this case, a PPP exchange rate is defined as the ratio of prices for a representative basket of final goods and services in two countries, with the prices expressed in the two national currencies. At this exchange rate, the purchasing power of the different currencies is equal (or has parity) in terms of the specific quality of a spe-cific bundle of goods or services that can be purchased. Because these PPP exchange rates reflect differences in the national prices of both non-traded and traded goods, they are very useful for international compari-sons of standards of living. [...] To illustrate the law of one price, let and be the domestic and foreign currency prices of com-modity (a good or service) and the exchange rate (expressed as the price of foreign exchange). Thus, the law of one price implies that . (1) To extend this illustration to PPP, let and be the domestic and foreign price levels, which are constructed by taking a weighted average of the prices of commodities in the national production or consumption baskets: , (2) where and represent the weights of com-modity in the basket. If it is further assumed that the weights are identical and the law of one price holds for all commodities, then (3) or . [...] the value of the exchange rate Absolute PPP is obtained by extending the law of one price to multiple commodities in an interna-tional setting. This “law” implies that, in the absence of transactions costs, competitive arbitrage should force the same good to sell for the same price, expressed in a given currency, across countries.

• Purchasing Power Parity - PACIFIC Exchange Rate Service

  competitive markets for the goods and services in both countries. (3) The law of one price only applies to tradeable goods; immobile goods such as houses, and many services that are local, are of course not traded between countries. Economists use two versions of Purchasing Power Parity: absolute PPP and relative PPP. Absolute PPP was described in the previous paragraph; it refers to the equalization of price levels across countries. Put formally, the exchange rate between Canada and the United States ECAD/USD is equal to the price level in Canada PCAN divided by the price level in the United States PUSA. Assume that the price level ratio PCAD/PUSD implies a PPP exchange rate of 1.3 CAD per 1 USD. If today's exchange rate ECAD/USD is 1.5 [...] against the US Dollar in the long run. A red bar indicates undervaluation of the local currency; the currency is thus expected to appreciate against the US Dollar in the long run. [...] Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket of goods and services. When a country's domestic price level is increasing (i.e., a country experiences inflation), that country's exchange rate must depreciated in order to return to PPP. The basis for PPP is the "law of one price". In the absence of transportation and other transaction costs, competitive markets will equalize the price of an identical good in two countries when the prices are expressed in the same currency. For example, a