Purchasing Power Parity | How does it work?

2 years ago

Someone living in the US makes $40,000 in a year and if we convert it to Indian rupee, that would be more than 32,000,00 (32 lac) INR. Based on such a huge number of 32 lac, we consider that it is a handsome salary.

But in reality, it is not.

With the help of PPP, one can identify the quality of life of an individual living in any country by comparing his/her own income of home country.

It is a little complicated topic but we will understand with the easiest way.

Importance of Purchasing Power Parity

At the beginning of the article, we took an example of $40,000 annual income for a person living in the United States of America.

Looking at the actual exchange rate, the total amount would be a 32 lac (considering $1 = 82 INR).

Here, if we look at the PPP term, this amount would be only 9.25 lac.

Are you shocked?

Let me explain how it works.

Here, if you have got the income of 9.25 lac a year in India, you can live the same type of quality of life with a person living in the United States earning $40,000 in a year.

We are here talking about the quality of life which includes…

Can you afford to have a car?
Can you afford to buy a house? and if not, can you afford to pay the rent?
Can you afford to cover child expenses?
Can you afford to have a vacation with your family once a year?
Can you afford to give quality education to your child?
How much money can you save in a year?
Can you afford to have an Air Condition/Heater in your house? And so on…

Therefore, if you earn 15,000,00 INR (15 lac) in India, and wish to enjoy the same type of lifestyle in America, you need to have an income of $64,800 in a year.

However, if we look at the actual exchange rate, $64,800 means 53.13 lac INR.

Since it makes a huge difference, it is essential to know for everyone wants to settle abroad.

If you wish to do some experiments with numbers, feel free to visit Purchasing Power Parity Salary Converter. It is very simple and easy to use.

For easier explanation, let me take you to one more example.

Image: Picodi.com

This image shows the iPhone Index 2022 in which they have done the research of how many days does it require to buy an iPhone 14 Pro (128 GB).

As you can see from the image, it takes only 5.7 days to buy an iPhone in the US. That means, if you work for full time in the US for 5.7 days, you will have sufficient money so that you can buy an iPhone 14 Pro.

The United States of America has a GDP per capita of more than $63,000. It means, an individual living in America on an average makes $63,000 a year. Also, USD is far more powerful than Indian rupee.

However, if you look at the image again, you will see that it takes 64.9 days of work to buy an iPhone in India.

Why?

Again, if we have a look at the GDP per capita of India, it is less than $2,000. That means, an average individual in India makes $2,000 a year. And therefore, an average individual living in India has to work at least 64.9 days to afford an iPhone.

Note: GDP per capita is calculated based on the population of the country. Hence, you see the GDP per capita of India is only around $2,000.

Here, we have not considered other expenses of living. We have assumed here that you will save all your money to buy an iPhone. That means, to buy an iPhone in India, you will need to save for 64.9 days of work.

Also read: #2 Most Effective Ways to Fight Against Currency Depreciation

Conclusion

If you plan to move abroad, please do make sure you are making enough money so much so that the PPP matches with your current lifestyle. Always keep that in my how much money you would require to improve lifestyle or maintain lifestyle.