What are Purchasing Power Parities?
Purchasing power parities (PPPs) are currency exchange rates obtained by comparing the prices of identical goods and services in different countries. These price comparisons are made by dividing the price of a specific good or service in one country by the price of the same item in another country. For example, if a 300 milliliter can of Pepsi costs Rp16.42 in country A and $3.24 in country B, a price relative can be calculated as 3.24/16.42, or 0.197. This is the “Pepsi PPP” for countries A and B. Also called “price relatives”, PPPs are calculated for several hundred items covering all the final expenditure components of GDP. These PPPs for individual goods and services are then combined to obtain PPPs for higher levels of aggregation such as “Bread and Cereals”, “Food and Beverages”, “Household Individual Consumption” and, eventually, GDP as a whole. In combining lower-level PPPs to obtain higher aggregates, the shares in GDP of expenditure on the various goods and services are used
