What is purchasing power parity? How PPP compares prices between countries
By SendPay Business · · 2 min read
Purchasing power parity (PPP) is the idea that, over time, exchange rates should move so that the same basket of goods costs the same in different countries once prices are converted into one currency.
A simple example
If a basket of shopping costs £100 in the UK and $150 in the US, PPP suggests an exchange rate of $1.50 to the pound. If the market rate is different, one currency looks cheap or expensive by that measure.
The Big Mac Index
The Economist has published the Big Mac Index since 1986. It compares the price of a Big Mac in different countries as a light-hearted way to show which currencies look over- or undervalued against PPP.
Why rates drift from PPP
- Many things, like haircuts and rent, can't be traded across borders.
- Taxes, transport costs and local wages differ.
- Interest rates and investment flows move currencies day to day.
How PPP is used
The World Bank and IMF use PPP rates to compare incomes and economy sizes between countries more fairly than market exchange rates allow.
Where SendPay fits
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This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.