An interactive guide to PPP theory, the Big Mac Index, exchange rate calculators and why rates deviate from equilibrium.
Purchasing Power Parity (PPP) is an economic theory stating that exchange rates between currencies should adjust so that an identical basket of goods costs the same in every country when expressed in a common currency.
PPP is used by economists to compare living standards across countries, predict long-run exchange rate movements, and assess whether currencies are overvalued or undervalued.
PPP Exchange Rate = Price in Country B ÷ Price in Country AEnter the price of an identical basket of goods in two countries to calculate the PPP exchange rate. Updates live as you type.
The strict version. States that identical goods should cost exactly the same everywhere when converted to a common currency. Rarely holds in practice due to trade barriers, taxes and non-traded goods.
Exchange Rate = Price Level (B) ÷ Price Level (A)The more realistic version. States that the percentage change in the exchange rate should equal the inflation rate differential between two countries. Allows for permanent price level differences.
% Change in Exchange Rate ≈ Inflation (B) − Inflation (A)PPP rarely holds in the real world. Click each limitation to explore why it breaks down.
Created by The Economist in 1986. Enter real Big Mac prices to see which currencies are over or undervalued according to PPP theory.
Six questions covering PPP theory, calculations and real-world applications.