The Purchasing Power Parity (PPA): An Essential Economic Concept

Key takeaways

• The PPP compares currencies by looking at what you can really buy. The same basket of goods, different prices depending on the countries.

• It adjusts GDP between countries. It gives a more accurate picture of the actual standard of living. Not just cold numbers.

• With inflation hovering around 3.4% in 2025, the PPP helps explain why some are turning to other assets. Especially in countries where everything is skyrocketing.

Introduction

A coffee for €5 in Paris but €2 elsewhere? Strange, right? This is where purchasing power parity comes into play.

The PPP is like a magnifying glass that shows us what our money is really worth depending on where we are. A meal in Mexico. Shoes in Sweden. The PPP makes these comparisons possible.

Let's see how it works.

Operation of the PPA

It all starts with the law of one price. In theory, the same product should cost the same everywhere. Simple.

Let's take a smartphone: 800€ in France, 900 Canadian dollars in Canada. The rate should be around 1.13 Canadian dollars for 1 euro.

But the real world is more complicated. Taxes. Transport. Local tastes. It changes everything.

Economists then use a standard basket of goods. Food. Clothing. Housing. Energy. By comparing this basket, one can better see the strength of currencies.

Why is the PPA important?

It's not just an abstract idea. Far from it.

When we talk about a country's GDP, PPP changes everything. India seems poor with standard exchange rates. But adjust with PPP? The picture is different. Very different.

In 2025, the IMF and the World Bank are heavily relying on these adjusted figures. Inflation makes this even more relevant.

Comparison of living standards

The PPA shows how far your salary goes according to the countries. €45,000 a year? Rich here, just average over there. Poor elsewhere.

Exchange Rate Forecasts

Currencies are constantly moving. In the short term, it's chaos. But over the long term, they tend to align with what the PPP suggests. It's fascinating.

Revealer of manipulations

Some governments manipulate their rates. The PPP exposes them. It does not lie.

The Big Mac Index and Other Examples

The magazine The Economist had a brilliant idea: the Big Mac index. An identical sandwich everywhere. Different prices.

A Big Mac for €5 in France but equivalent to €3 in Thailand? That says a lot.

Others have copied the idea. iPad index. KFC index. It makes the PPA less abstract.

Challenges and Limitations

The PPA is not perfect. Far from it.

The quality is an issue. A more expensive product is sometimes simply… better. Not comparable.

Local services too. A haircut, rent. These things do not cross borders.

And then there is inflation. In 2025, China has low inflation. Russia is galloping. It complicates everything.

PPA and preservation of purchasing power

The PPA informs our investment choices. Especially in countries with weak currencies.

Digital assets attract where currencies collapse. Logical.

In 2025, the options are varied: TIPS, REITs, high-yield accounts. It all depends on your context.

Conclusion

The PPA makes sense of the chaos of global prices. Imperfect but valuable.

Economist or just a traveler astonished by foreign prices, she enlightens you. In a world where wages often struggle to keep up with inflation, understanding PPP is a bit like having a map in unfamiliar territory. Essential.