Economic Development Indices Questions Medium
Purchasing Power Parity (PPP) is an economic concept that measures the relative value of different currencies by comparing the prices of a basket of goods and services across different countries. It is used to determine the exchange rate that would make the purchasing power of a currency equal in different countries.
PPP takes into account the fact that the cost of living and the prices of goods and services vary between countries. By comparing the prices of a standardized basket of goods, such as food, housing, transportation, and other essential items, PPP allows for a more accurate comparison of living standards and economic development between countries.
The PPP exchange rate is calculated by dividing the price of a basket of goods in one country by the price of the same basket in another country, and it reflects the relative purchasing power of the two currencies. This exchange rate is often used to convert national income and economic indicators, such as GDP (Gross Domestic Product), into a common currency for international comparisons.
Purchasing Power Parity is an important tool for understanding and analyzing economic development and inequality between countries. It helps to adjust for differences in prices and living standards, providing a more accurate picture of the economic well-being and development levels across nations.