PPP Calculator — Purchasing Power Parity
Calculate purchasing power parity (PPP) to determine the correct exchange rate between currencies based on their relative price levels. PPP helps assess whether currencies are overvalued or undervalued.
Price Comparison
Exchange Rate Information
PPP Results
PPP Exchange Rate:
0.0000
Nominal Exchange Rate:
0.0000
Currency Valuation:
N/A
Currency Analysis
Over/Undervaluation:
0.00%
Adjustment Needed:
0.00%
Market Implication:
N/A
Economic Indicators
Real Exchange Rate:
0.0000
Purchasing Power:
N/A
Trade Competitiveness:
N/A
Understanding Purchasing Power Parity
Purchasing Power Parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. It suggests that exchange rates should adjust to equalize the price of identical goods and services in different countries.
PPP Formula
Absolute PPP
- S = P1 / P2
- S = Exchange rate (units of currency 1 per currency 2)
- P1 = Price of good in country 1
- P2 = Price of good in country 2
- Assumes identical goods
Relative PPP
- ?S/S = ?P1/P1 - ?P2/P2
- ?S/S = Percentage change in exchange rate
- ?P1/P1 = Inflation rate in country 1
- ?P2/P2 = Inflation rate in country 2
- Focuses on inflation differentials
Types of PPP
Different Approaches to PPP
Absolute PPP
- Compares identical goods prices
- Determines equilibrium exchange rate
- Based on law of one price
- Strong theoretical foundation
- Difficult to implement in practice
Relative PPP
- Compares inflation rates
- Predicts exchange rate changes
- More practical approach
- Used for forecasting
- Assumes constant real exchange rate
Big Mac Index Example
| Country | Big Mac Price (Local) | Exchange Rate | PPP Rate | Undervaluation (-)/Overvaluation (+) |
|---|---|---|---|---|
| United States | $5.65 | 1.00 USD | 1.00 | 0% |
| Switzerland | CHF 6.50 | 0.85 CHF/USD | 1.15 | +15% |
| India | ? 150 | 0.012 USD/INR | 0.038 | -68% |
Applications of PPP
Currency Valuation
- Assess currency over/under valuation
- Identify trading opportunities
- Investment decision making
- Risk assessment
Economic Comparisons
- GDP comparisons
- Income level analysis
- Living standards
- Economic development
Policy Analysis
- Exchange rate policy
- Inflation targeting
- Monetary policy
- Trade policy
Business Strategy
- Pricing strategies
- Market entry decisions
- Cost analysis
- Competitive positioning
Limitations of PPP
Theoretical Issues
- Non-traded goods
- Transportation costs
- Tariffs and trade barriers
- Quality differences
Practical Challenges
- Data availability
- Basket composition
- Short-term volatility
- Structural changes
Key Takeaways for PPP Calculator
- PPP compares currencies based on their purchasing power rather than nominal exchange rates
- Absolute PPP compares the prices of identical goods in different countries
- Relative PPP focuses on inflation differentials between countries
- PPP helps determine if currencies are overvalued or undervalued
- The Big Mac Index is a popular practical application of PPP
- PPP is useful for long-term exchange rate predictions
- PPP has limitations due to non-traded goods and other market imperfections
- Use the calculator to assess currency valuations and economic comparisons