Purchasing Power Parity Calculator
From the price of a basket in two places, compute the PPP implied exchange rate to judge if a currency is over- or under-valued.
Input Data
Results
At a glance:PPP says a basket should cost the same everywhere at the right exchange rate. The implied rate = domestic price ÷ foreign price (local currency per foreign currency unit). Comparing it with the market rate shows whether a currency looks over- or under-valued.
Formula
Implied rate = domestic basket price ÷ foreign basket price.
$$ImpliedRate = \dfrac{DomesticPrice}{ForeignPrice}$$How to Use
- Enter the local basket price in local currency.
- Enter the foreign basket price in foreign currency.
- Read the PPP implied exchange rate.
FAQ
What is PPP and what is it used for?
Purchasing power parity (PPP) is a theory that, in the long run, exchange rates should equalise the price of a basket of goods across countries. It is widely used to compare living standards and economic size across nations, such as the World Bank's GDP comparisons at PPP, rather than as a short-term exchange-rate forecast.
What does the implied exchange rate mean?
The implied exchange rate is the rate that would make the two countries' price levels identical — the market rate that PPP 'predicts'. Comparing it with the actual market rate shows whether a currency is over- or under-valued.
Why do actual and implied exchange rates differ?
The 'law of one price' rarely holds because of trade barriers, transport costs, non-tradable services, taxes and tariffs. So the actual rate deviates from PPP, sometimes for long periods, which is why PPP fits long-run analysis, not day-to-day rates.
How should I read the over/under-valuation result?
If the market rate is above the implied rate, the local currency is over-valued (local goods look expensive); if below, under-valued. Treat it as a rough gauge of currency misalignment, against the basket you chose, not a definitive buy/sell signal.
What is the relationship between PPP and the Big Mac Index?
The Big Mac Index is a famous, intuitive application of PPP: it uses the price of a McDonald's Big Mac in different countries to compute the 'implied exchange rate' and compare whether currencies are over- or under-valued. The principle is exactly the PPP method here — only the 'basket' is simplified to one standardised product. The Big Mac is well known because it is standardised worldwide, but it has limitations (local costs like rent and labour differ), so it is a popular illustration rather than a rigorous measure. The PPP method is more general: you can choose any basket (the same goods in two places) and derive the implied rate from their price ratio; the Big Mac is just a single-product special case. The Big Mac Index is published by The Economist and is a good entry point to understand PPP; for serious cross-country comparison, use the World Bank or IMF's broad-basket PPP data.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.