Purchasing Power Parity

The idea that exchange rates should equalize what money actually buys in each country.

Purchasing power parity (PPP) holds that identical goods should cost the same everywhere once converted at the right exchange rate — and that actual rates drift toward that level over time. Economists use PPP-adjusted figures to compare living standards, since a dollar buys far more in some countries than others. The Economist's Big Mac Index applies the idea with one standardized burger: if the burger is much cheaper in one currency, that currency may be undervalued. In the short run, though, exchange rates routinely stray far from parity.

Measured at purchasing power parity, the country's economy ranks far higher than its market exchange rate suggests.