Purchasing Power Parity (PPP)
An economic theory that compares currencies by measuring how much a standardized basket of goods costs in different countries, revealing whether currencies are over- or undervalued.
How It Works
Purchasing power parity is the idea that in the long run, exchange rates should adjust so that identical goods cost the same in every country when converted to a common currency. The Big Mac Index, created by The Economist in 1986, is the most famous informal PPP tool, it uses McDonald's prices worldwide to estimate currency misalignment. Burgernomics applies a similar concept domestically, comparing the cost of identical ingredients across U.S. regions. While a Big Mac costs the same everywhere in theory, ingredient prices vary significantly by geography due to regional labor costs, transportation, local supply chains, and competition. The World Bank and IMF use more rigorous PPP calculations through the International Comparison Program, which surveys prices for over 1,000 goods across 176 countries. PPP-adjusted GDP often tells a different story than nominal GDP, for example, China's PPP-adjusted GDP surpassed the United States in 2017.
Related Terms
- Big Mac Index, An informal measure of purchasing power parity invented by The Economist in 1986, comparing the price of a McDonald's Big Mac across countries to assess whether currencies are correctly valued.
- Regional Price Differences, Systematic variations in food prices across U.S. geographic regions, driven by proximity to production, local labor costs, transportation logistics, and competition among retailers.
- Cost of Living, The amount of money needed to maintain a particular standard of living in a given location, including housing, food, transportation, healthcare, and taxes.
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About This Definition
This definition is part of the Burgernomics Food Economics Glossary, 25 terms explaining food pricing, inflation, and economic concepts. Written for consumers, journalists, students, and anyone who wants to understand why their groceries cost what they do.