Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is an economic theory that compares the relative purchasing power of different currencies by measuring the cost of an identical basket of goods and services across countries. Under PPP, exchange rates should theoretically adjust so that an identical item costs the same in two countries after currency conversion. In practice, PPP-adjusted GDP comparisons reveal the true economic size of countries more accurately than market exchange rate comparisons — India ranks as the third-largest economy globally on a PPP basis, even though its nominal GDP (at market exchange rates) is lower. PPP is widely used by economists, multilateral institutions, and investors to make cross-country comparisons of living standards, labour costs, and real economic output.