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Purchasing power parity


Theories that invoke purchasing power parity (PPP) assume that in some circumstances (for example, as a long-run tendency) it would cost exactly the same number of, for example, US dollars to buy euros and then to use the proceeds to buy a market basket of goods as it would cost to use those dollars directly in purchasing the market basket of goods.

The concept of purchasing power parity allows one to estimate what the exchange rate between two currencies would have to be in order for the exchange to be at par with the purchasing power of the two countries' currencies. Using that PPP rate for hypothetical currency conversions, a given amount of one currency thus has the same purchasing power whether used directly to purchase a market basket of goods or used to convert at the PPP rate to the other currency and then purchase the market basket using that currency. Observed deviations of the exchange rate from purchasing power parity are measured by deviations of the real exchange rate from its PPP value of 1.

PPP exchange rates help to minimize misleading international comparisons that can arise with the use of market exchange rates. For example, suppose that two countries produce the same physical amounts of goods as each other in each of two different years. Since market exchange rates fluctuate substantially, when the GDP of one country measured in its own currency is converted to the other country's currency using market exchange rates, one country might be inferred to have higher real GDP than the other country in one year but lower in the other; both of these inferences would fail to reflect the reality of their relative levels of production. But if one country's GDP is converted into the other country's currency using PPP exchange rates instead of observed market exchange rates, the false inference will not occur.

Essentially GDP PPP controls for the different costs of living and price level, usually relative to the United States Dollar, that would make an accurate depiction of a given nation's gross income.

The idea originated with the School of Salamanca in the 16th century and was developed in its modern form by Gustav Cassel in 1918. The concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.


Country or region Price level (% relative to the US)
India -59
South Africa -54
Hong Kong -50
Ukraine -47
Egypt -45
Russia -45
Taiwan -42
Mainland China -41
Malaysia -41
Sri Lanka -37
Indonesia -35
Mexico -34
Philippines -33
Poland -33
Bangladesh -32
Saudi Arabia -33
Thailand -33
Pakistan -32
Lithuania -30
Latvia -25
UAE -25
South Korea -22
Japan -20
Singapore -17
Estonia -16
Czech Republic -15
Argentina -13
Hungary -13
Peru -11
Israel -8
Portugal -8
United Kingdom -3
New Zealand -1
Chile 0
United States 0 (by definition)
Costa Rica 1
Greece 3
Austria 5
Netherlands 7
Ireland 8
Spain 9
Turkey 10
Colombia 11
Australia 12
Euro area 12
France 12
Germany 13
Finland 17
Belgium 18
Denmark 19
Italy 20
Canada 24
Uruguay 25
Brazil 29
Switzerland 63
Sweden 75
Norway 80
Venezuela 108
Country or region Price (US Dollars)
Argentina $1,094.11
Australia $506.66
Austria $674.96
Belgium $618.34
Brazil $791.40
Brunei $525.52
Canada (Montréal) $557.18
Canada (no tax) $467.36
Chile $602.13
Mainland China $602.52
Czech Republic $676.69
Denmark $725.32
Finland $695.25
France $688.49
Germany $618.34
Greece $715.54
Hong Kong $501.52
Hungary $679.64
India $512.61
Ireland $630.73
Italy $674.96
Japan $501.56
Luxembourg $641.50
Malaysia $473.77
Mexico $591.62
Netherlands $683.08
New Zealand $610.45
Norway $655.92
Philippines $556.42
Pakistan $550.00
Poland $704.51
Portugal $688.49
Russia $596.08
Singapore $525.98
Slovakia $674.96
Slovenia $674.96
South Africa $559.38
South Korea $576.20
Spain $674.96
Sweden $706.87
Switzerland $617.58
Taiwan $538.34
Thailand $530.72
Turkey $656.96
UAE $544.32
United Kingdom $638.81
US (California) $546.91
United States (no tax) $499.00
Vietnam $554.08
Country Price level (USA = 100)
Australia 123
Austria 99
Belgium 101
Canada 105
Chile 67
Czech Republic 59
Denmark 128
Estonia 71
Finland 113
France 100
Germany 94
Greece 78
Hungary 52
Iceland 111
Ireland 109
Israel 109
Italy 94
Japan 96
South Korea 84
Luxembourg 112
Mexico 66
Netherlands 102
New Zealand 118
Norway 134
Poland 51
Portugal 73
Slovak Republic 63
Slovenia 75
Spain 84
Sweden 109
Switzerland 162
Turkey 61
United Kingdom 121
United States 100

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Wikipedia

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