What Is Purchasing Power Parity—PPP?

One popular macroeconomic analysis metric to compare economic productivity and standards of living between countries is purchasing power parity (PPP). PPP is an economic theory that compares different countries’ currencies through a “basket of goods” approach.

According to this concept, two currencies are in equilibrium—known as the currencies being at par—when a basket of goods is priced the same in both countries, taking into account the exchange rates.

  • Purchasing power parity (PPP) is a popular metric used by macroeconomic analysts.
  • PPP compares economic productivity and standards of living between countries.
  • Some countries adjust their gross domestic product (GDP) figures to reflect PPP.

Every three years, the World Bank releases a report that compares various countries, in terms of PPP and U.S. dollars. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) use weights based on PPP metrics to make predictions and recommend economic policy. The recommended economic policies can have an immediate short-term impact on financial markets.

Nations With the Highest Purchasing Power Parity—PPP

There are five nations that have the highest GDP in market exchange terms. The list is as follows:

  1. United States
  2. China
  3. India
  4. Japan
  5. Germany