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What Is PPP or Purchasing Power Parity?

PPP or purchasing power parity, is a type of economic technique that is employed when one wants to find out the relative values of two different currencies. The PPP is important because it is a handy technique to use especially because the amount of goods a particular currency can buy will vary between two different countries. Factors like the demand for goods and its availability among other different factors are difficult to find out. PPP is the solution to this. The PPP will take an international measure, find out the cost for this particular measure between the two currencies, and then compare the two amounts.

One of the most popular implementations of purchasing power parity is the so called Big Mac index, which the Economist Magazine came up with. By using the Big Mac index, a person can find out the cost of a McDonalds Big Mac burger in several countries. From here, the exchange rate can be arrived at based on this index.

One of the basic uses of PPP is in limiting the sometimes confusing effects of the shifts that happen in a national currency. This effect is particularly an issue when trying to find out a countrys Gross Domestic Product of GDP. If a person just looks at the fall in the value of a currency, usually that countrys GDP will also drop at about the same rate as the currencys drop. But looking at it from that perspective is not accurate as it does not show the standard of living in that country (which is one of the uses of GDP), because the currency devaluation may have been caused by other factors. By employing the purchasing power parity, the person will be able to get a more objective view of the state of the currency.

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