Economy
Purchasing Power Parity (PPP)
Definition
A theory and method that adjusts exchange rates to equalize the purchasing power of different currencies.
Explanation
PPP answers the question: "How much does $1 actually buy in different countries?" If a Big Mac costs $5 in the US but $2.50 in India, the PPP exchange rate is 2:1, meaning India's prices are half of US prices. The World Bank and IMF use PPP-adjusted figures to compare economies more fairly than market exchange rates allow.