What is PPP?

The idea of Purchasing Power Parity (PPP) came about as academics were trying to equate results from very different places. The task was very difficult because of different exchange rates between the currencies involved and (slightly differently) because of the different costs in each of those countries.

So the idea was to adjust the real value of an economy to a standard figure, usually based in US dollars. This figure is intended to reflect what the value of their economy would buy in local terms.

The importance of this is clear to see. If country A spends $10million on its navy and country B spends $100million on its navy you might think that country B is much more committed to defence. But if low wages and low material costs mean that, in country A, their $1million buys them 10 warships and crew whereas in country B their $100million buys them only eight warships and crew, the position looks very different. The value of country A’s expenditure might be treated as $125million PPP.

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