Purchase Power Parity

See: Purchasing Power.

Not all currencies are created equal. It might cost you $9 for a solid meal of chicken and rice in the U.S., but go to Thailand and you can get it for 60 baht (about $2).

Why? This is purchase power parity (PPP). Macroecon measure of the differences in standards of living and productivity between nations.

The PPP for chicken and rice? It’s always the cost of a good in one currency divided by the cost of the same good in the other country’s currency. Here, that means $9 divided by $2 = 4.5.

Why is this? The biggest factors are the cost of land to rent the restaurant and the cost of labor. Those things are much cheaper in Thailand than they are in the U.S., making the rice and chicken cheaper. They’re cheaper because Thailand has a lower GDP per capita and lower standards of living. It also means that Thailand has a lot of room to grow...and it is growing. The PPP gap between higher GDP per capita nations and Thailand, as well as other “tiger economies,” is shrinking as they grow. Vacationers, expats, and investors are flocking to Thailand, taking advantage of this PPP, spending their dollars, which also boosts the economy, creating a lot of growth.

Usually though, PPP is calculated with baskets of goods rather than getting super-specific about the PPP of a spicy bean burrito with extra cheese. The World Bank tracks PPP of large baskets of goods and compares them across nations, which it reports every three years in U.S. dollars. Think: transport costs, tax differences, market competition (thanks, regulations), labor costs...you get the picture. The big one.

Who else is into the PPP party? The International Monetary Fund, the Organization for Economic Cooperation, and even forex traders (currency traders).

Top PPP dog driver? The U.S...we’re number one! In this case, anyway. Number two and three are China and India...the big’uns. Four and five are Japan and Germany, respectively. Lands of classy cars.