What is Purchasing Power Parity (PPP) - UPSC Economy Notes
Purchasing Power Parity (PPP) exchange rate tells us how much money in one country is needed to buy the same goods as in another country
What is Purchasing Power Parity (PPP) Actually Saying? The concept of Purchasing Power Parity (PPP) is saying: 🔹 The value of a currency should be based on how much it can buy in different countries. 🔹 If the same product (or basket of goods) costs different amounts in two countries, we can calculate the "fair" exchange rate using those prices. In simple terms, PPP exchange rate tells us how much money in one country is needed to buy the same goods as in another country. Breaking It Down Simply: Imagine you are in India and USA at the same time. You want to buy the same burger in both places. In India , the burger costs Rs. 35 In USA , the burger costs $1 ➝ If $1 buys 1 burger in the USA, how many rupees should buy the same burger in India? ➝ Clearly, Rs. 35 should be enough to buy the burger in India. ➝ So, the PPP exchange rate is $1 = Rs. 35 . Now, compare this with the Nominal Exchange Rate (NER) . Suppose the market exchange rate is: $1 = Rs. 70 This means that if you convert $1 to rup…