Purchasing power parity

Purchasing power parity (PPP)[1] is a measurement 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 basket of goods 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.[2]

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.[3] 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".[4]

The IMF considers that GDP in purchase power parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally. The IMF believes that GDP at market rates is a more relevant comparison.[5]


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