Purchasing Power Parity: Why does it matter how much your money is worth abroad?

A simple question: Why does the price differ?

Have you ever noticed that a hamburger costs a lot more money in America than in Asia? Or that the rent for an apartment in one city would consume half of your monthly salary, while in another it would cost a fraction? The answer is a phenomenon long known to economists: purchasing power parity (PPP) – that is, how the value of money actually works in different places.

PPP is not just a dry economic term. It is a practical tool that helps to understand why money does not mean the same everywhere. Whether you need to calculate what salary you would need in another city, or you are examining how people live in other countries – purchasing power parity is the key to the answer.

The principle of PPP: The law of “one price”

The entire concept starts from a simple idea. If there were a global market with no borders, then the same product would cost the same everywhere – calculated after the exchange rates.

Imagine this in practice. A new smartphone costs $500 in the USA. The same phone costs 55,000 yen in Japan. Based on PPP, this means that the exchange rate should be around 1 dollar = 110 yen. Quite a straightforward calculation, right?

However, reality is more complicated. Due to taxes, logistics costs, local demand, and many other factors, prices vary from country to country. Economists therefore focus not on a single product but on a complete basket of goods – a combination of food, clothing, energy, housing, and other basic needs. By comparing the prices of these, the true power relations of currencies can be determined.

How can PPP be used in the real world?

Purchasing power parity has many practical applications. One of the most important is that it helps to compare the economic strength of countries more realistically.

When international organizations like the IMF or the World Bank examine a country's GDP, they often work with PPP adjustments. This provides a much clearer picture of what people actually earn and spend – it's not just about the numbers on paper.

Let's take India as an example. Its GDP per capita may seem low at the exchange rate, but when we incorporate PPP, which takes into account the lower cost of living, the purchasing power of the people appears to be much higher. This provides insight into how the average Indian worker actually lives.

Standard of living comparison in a different light

One useful way to apply PPP is through standard of living comparisons. Taking local prices into account, you can see where a certain salary ensures a comfortable life. $50,000 a year means luxury in one place, while it represents poverty in another.

Long-term analysis of price movements

Currencies fluctuate for a variety of reasons in the short term – political crises, market movements, economic data. However, over a longer time horizon, they generally tend to get closer to what the PPP indicates. This allows economists to forecast long-term trends.

The “Big Mac index” and other real metrics

Have you heard of the so-called Big Mac index? The Economist developed this entertaining method to understand purchasing power parity. The idea is brilliant: since McDonald's Big Mac sandwiches are almost identical worldwide, comparing their prices provides a quick insight into the true strength of currencies.

If it costs 5 dollars in the USA and 3 dollars in India, that already says something about the real difference between the dollar and the rupee. This index has been followed by other products over the years – the iPad index, the KFC index – each of which shows how we can use everyday items to understand the economy.

PPP and the Cryptocurrency World

Although purchasing power parity and cryptocurrency markets are not directly related, there is a connection between them that is worth understanding.

Bitcoin and other cryptocurrencies are global assets, and an interesting phenomenon is occurring: those people living in countries with weak currencies or high inflation may find it more expensive to buy crypto. However, this can paradoxically also be an advantage – protection against currency devaluation.

This is especially true in regions affected by hyperinflation. When a local currency quickly loses its value, Bitcoin and other digital assets provide an alternative. But even more importantly, stablecoins ( are cryptocurrencies that are typically tied to another currency or asset) allowing people to truly preserve their purchasing power.

Imagine living in a country where inflation is 50% per year. Your salary there is rapidly losing value. Switching to a stablecoin means your money does not lose value – at least not as quickly. In practice, this means that purchasing power parity is not just a theoretical concept – it can be the stake in people's financial survival.

The limitations of PPP: Not everything is the same

However, purchasing power parity has more substantiated limitations as well. One of the most important is the issue of product quality. A product may be more expensive in one country simply because it is better. Thus, direct price comparisons do not always interpret identical products.

Another problem is non-tradable goods – houses, local services, hairdressers, electricians. The prices of these are entirely dependent on local conditions and cannot be compared globally.

Inflation is not left out either. PPP assumes that prices remain relatively stable, but the reality is different. Inflation can quickly change the picture, and a comparison that is valid today may be outdated in a few months.

What does this mean for the average person?

After all, purchasing power parity is not just for economists. It shows that the real value of your money depends on where you live. This affects how much you need to earn from another place to live the same life. This is real, practical information.

Whether you're considering moving abroad, evaluating a new job, or just curious why everything is so cheap ( or expensive ) during your break – purchasing power parity is always relevant. This tool helps us not only see the numbers but also understand what they actually mean in everyday life.