The Economist’s Big Mac index is a famous, light-hearted PPP test. Prices of non-traded services (rent, haircuts) are lower in poorer countries, so their currencies usually look undervalued by PPP.
How to use the PPP Calculator: Purchasing Power Parity
- Price in country A (base currency)
- Price in country B (local currency)
- Market exchange rate (B per 1 A)
- Amount in currency A to compare
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the price of the same item or basket in both countries and the market exchange rate (units of currency B per 1 unit of currency A).
Inputs explained
| Field | What to enter |
|---|---|
| Price in country A (base currency) | Amount in your currency |
| Price in country B (local currency) | A number |
| Market exchange rate (B per 1 A) | A number |
| Amount in currency A to compare | Amount in your currency |
What each result means
- PPP exchange rate (B per 1 A) = [Price in country B (local currency)]÷[Price in country A (base currency)]
- Currency B over (+) / under (−) valuation = ([PPP exchange rate (B per 1 A)]÷[Market exchange rate (B per 1 A)] – 1)×100
- What the amount buys in country B, valued at home prices = [Amount in currency A to compare]×[Market exchange rate (B per 1 A)]÷[PPP exchange rate (B per 1 A)]
Example values
How the main result changes when Price in country A changes and everything else stays at the example values above:
| Price in country A (base currency) | PPP exchange rate (B per 1 A) |
|---|---|
| 2.9 | 500 |
| 4.35 | 333.333 |
| 5.8 | 250 |
| 7.25 | 200 |
| 8.7 | 166.667 |
| 11.6 | 125 |
Formula
PPP rate = price in country B (local currency) ÷ price in country A (base currency)
Valuation = (PPP rate ÷ market rate − 1) × 100
Negative = currency B undervalued vs currency A
Worked example
Inputs: Price in country A (base currency): $5.8; Price in country B (local currency): 1,450; Market exchange rate (B per 1 A): 280; Amount in currency A to compare: $100.
Results: PPP exchange rate (B per 1 A) = 250; Currency B over (+) / under (−) valuation = -10.71 %; What the amount buys in country B, valued at home prices = $112.00.
Frequently asked questions
What is purchasing power parity?
The exchange rate at which the same basket costs the same in both countries.
What is the Big Mac index?
The Economist's PPP comparison using Big Mac prices.
Why don't exchange rates match PPP?
Trade barriers, non-traded goods, capital flows and taxes.