Purchasing power parity
Definition. Purchasing power parity is a method of comparing living standards across countries by converting incomes using a rate that reflects the relative cost of a common basket of goods and services, rather than the market exchange rate. It ensures a given sum buys an equivalent quantity of goods in each country being compared.
PPP adjustment matters because market exchange rates do not capture price differences for non traded goods and services, which are often cheaper in lower income countries. It gives a fairer real income comparison.
This term belongs to Standard of Living in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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