Purchasing power parity (PPP): what it means

A conversion rate that reflects how much the same basket of goods costs in different countries, used to compare living standards and economy size internationally.

A purchasing power parity (PPP) is the rate at which one currency would need to be converted into another to buy the same goods and services in each country. PPPs are estimated through the International Comparison Program, led by the World Bank, and by the OECD and Eurostat.

Worked example

Suppose a hypothetical identical basket costs £80 in the UK and $120 in another country. The PPP is 1.5 dollars per pound. If the market exchange rate is 1.25 dollars per pound, converting UK GDP at market rates would understate what UK incomes buy relative to that country's, compared with converting at PPP.

When to use which

• PPP-based comparisons are suited to living standards and volumes, such as GDP per head.
• Market exchange rates are suited to things traded across borders, such as debt owed in foreign currency or aid budgets.

How it trips up claims

• Rankings can change depending on which conversion is used. Check whether a league table uses PPP or market rates.
• PPPs are estimates and are revised when new price surveys are completed.

See how to check international comparisons.

Also searched as: PPP, PPP exchange rate, GDP PPP, international dollars

Official definitions: World Bank: International Comparison Program · OECD: Purchasing power parities (PPP) · ONS: Improvements in the production of UK purchasing power parities data

Official figures that use this term

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Key figures where it matters

• UK GDP per head
• UK labour productivity (output per hour)
• Pound to US dollar exchange rate

Questions that use this term

• How does UK GDP compare with other countries?
• What is UK GDP per capita?
• How does UK health spending compare with other countries?

Related terms

• Per capita (per head): A total divided by the number of people in the population, such as GDP per head or spending per person, to allow fair comparison between places or years.
• Nominal GDP: Gross domestic product measured at current prices, without adjusting for inflation. Used for debt-to-GDP and spending-to-GDP ratios.

More inflation, prices and the economy terms: CPI (Consumer Prices Index) · CPIH · RPI (Retail Prices Index) · Core inflation · Nominal GDP · Chained volume measure · Bank Rate · Quantitative easing (QE) · Quantitative tightening (QT) · GDP deflator · Output gap · Productivity.