Recently, I had a fierce discussion with someone (let’s call the person ‘X’) regarding the concept of Purchasing Power Parity (PPP) and it’s relation to lifestyle and therefore by extension, it’s relation to income. Unfortunately, our discussion went in a tangent, yielding no conclusive understanding.

Here, I attempt to clarify and simplify the understanding of PPP as a common man.

The argument was: Is $300 in the US the same as Rs. 21,000 in India? [1] Though at the exchange rate that would seem to be true, the real question here is are they the same in value?

X claim was that irrespective of the location $300 was as important in the US, as Rs. 21,000 would be in India and that PPP does not matter. This is far from the truth and becomes obvious once we understand PPP. PPP as per Wikipedia [2] is the following:

Purchasing Power Parity (PPP) is measured by finding the values (in USD) of a basket of consumer goods that are present in each country (such as pineapple juice, pencils, etc.). If that basket costs $100 in the US and $200 in the United Kingdom, then the purchasing power parity exchange rate is 1:2.

As per Organisation for Economic Co-operation and Development (OECD) data [3], $1 translates to roughly Rs. 17.729 in 2017 in terms of PPP. Based on this data, $300 would translate to Rs. 5,318 in India. In other words, what we can afford for $300 in the US, would require only Rs. 5318 in India. Therefore, clearly Rs. 21,000 in India is way more valuable than $300 in the US.

An example from our day to day perspective would be that our favorite Rs. 35 McDonald’s burger in India wouldn’t be available for anything close to $0.50 in the US (based on exchange rate conversion), rather it would be available for something around 2$ (based on PPP conversion).

Someone earning Rs. 21,000 in India may afford a comfortable life, however, would $300 suffice for the same quality of life in the US? It probably wouldn’t, and if we use PPP based conversion we see that Rs. 21,000 in India would roughly correspond to $1184 in the US for maintaining a similar lifestyle.

Therefore, to maintain our current lifestyle in the United States, or when planning to emigrate, a mere conversion of rupees to dollars would not suffice. Rather a more appropriate conversion should be based on PPP. In fact, there already exists a really useful tool - Salary Converter [4] which helps convert salary across countries on the basis of PPP.

To summarize, while notionally $300 in the US may seem the same as Rs. 21,000 in India (based on exchange rate), in reality, (when taking into account PPP) they are not of the same value.


Footnote:

  1. 1: At the time of writing this post, exchange rate 1$ is Rs. 68.72. Assuming 1$ is Rs. 70 here for simplification. 

  2. 2: Wikipedia - Purchasing Power Parity 

  3. 3: OECD Data: purchasing-power-parities 

  4. 4: Salary Converter Tool: http://salaryconverter.nigelb.me/