purchasing power parity

Purchasing power parities, usually shortened to PPP, are the rates of currency conversion that aim to equalise the purchasing power of different currencies by eliminating differences in price levels between countries. That is the OECD's definition. The rate is worked out by pricing a basket of goods and services drawn from what economies actually buy, then establishing how much of each national currency it takes to purchase the same basket.

A market exchange rate answers a different question: what a currency trades for. A PPP rate answers what it buys. The two diverge whenever price levels differ between countries, so the same sum converted at market rates can represent very different real spending power. Converting at PPP removes that distortion, which is why international comparisons of income, poverty thresholds and the cost of a healthy diet are usually published in PPP dollars rather than at market rates. The OECD expresses its own figures as units of national currency per US dollar, and the basket it prices is sampled from final consumption expenditure, actual consumption, gross fixed capital formation and total goods and services.