Purchasing Power Parity (PPP)
Purchasing power parity (PPP) is a conversion rate between currencies that equalises what money can buy, calculated by comparing the cost of the same basket of goods and services in each country. It is used to compare incomes and living standards.
Also called: PPP · PPP exchange rate · purchasing power parities · international dollars
Market exchange rates are set by trade and capital flows, and they say little about local prices. A haircut or a bus fare costs far less in Dhaka than in Zurich, so converting a Bangladeshi wage into dollars at the market rate understates what it buys. A PPP rate corrects for this by asking how many units of local currency are needed to buy what one dollar buys in the United States.
The rates are produced by the International Comparison Program, a worldwide price survey coordinated by the World Bank, and are revised every few years. Figures expressed this way are often called international dollars. They are the basis for comparing GDP per person across countries and for the international poverty line.
PPP has limits. The result depends on which basket is priced, and baskets that suit one country fit another poorly. It is also not a rate anyone can transact at. Imports, foreign debt and cross-border payments are settled at market rates, so a country can look far richer in PPP terms than its ability to pay abroad would suggest.
In practice
PPP figures are estimates that change materially when the underlying price survey is updated. Comparisons across survey rounds need care.
Commonly confused with
| Term | How it differs |
|---|---|
| Market exchange rate | The market rate is the price at which currencies actually trade. A PPP rate is a statistical construct for comparing living standards and cannot be dealt at. |
See also
- International Poverty LineThe international poverty line is the World Bank's threshold for extreme poverty: a daily amount per person, expressed in purchasing-power-adjusted dollars, below which someone is counted as extremely poor. Since June 2025 it has been US$3.00 a day.
- Mid-Market RateThe mid-market rate is the midpoint between the price at which a currency pair is being bought and the price at which it is being sold — the rate with no margin added. It is a reference point for pricing, not a rate a customer transacts at.
- Hard CurrencyA hard currency is one that is widely accepted for international payment, freely convertible and expected to hold its value, such as the US dollar, euro, yen, pound sterling or Swiss franc. Suppliers abroad generally insist on being paid in one.
- DevaluationDevaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.
- Currency PairA currency pair is two currencies quoted against each other — EUR/USD, USD/JPY, GBP/INR. The first is the base currency, the second the quote currency, and the price says how many units of the quote currency one unit of the base is worth.