Purchasing Power Parity
First published: 2007
Brief summary
IMF explainer on PPP and long-run currency valuation.
Article
Purchasing power parity is an exchange rate that equalises the price of a comparable basket of goods and services across countries. It differs from a market exchange rate, which is the price at which currencies are exchanged in financial markets.
PPP rates are constructed from large international price comparisons. They are commonly used to convert national output and income into a common unit when comparing the real size of economies or standards of living.
Market exchange rates are generally more appropriate for converting cross-border financial flows. PPP rates are more stable and include information about non-traded goods and services, which are often substantially cheaper in lower-income economies.
PPP is difficult to measure because it requires extensive price surveys, product matching and estimates between survey rounds. It is therefore a statistical conversion method rather than a claim that market exchange rates must quickly move to the PPP value.
Source details and credits
- Source / publisher: IMF
- Source type: Explainer
- URL type: WWW
- Credits: IMF
- URL: https://www.imf.org/external/pubs/ft/fandd/2007/03/basics.htm