Using the PPP calculator effectively requires careful selection of comparable goods, accurate data collection, and thoughtful interpretation of results. Follow this systematic approach to ensure your PPP analysis provides meaningful insights for economic and investment decisions.
1. Selecting Comparable Goods and Services
Choose goods or services that are truly comparable across countries. The Big Mac is popular because it's standardized globally, but you can also use other products like Starbucks coffee, iPhone prices, or baskets of consumer goods. Avoid goods with significant local variations, high transportation costs, or different quality standards. Services can be trickier due to quality differences, so focus on standardized products when possible.
2. Gathering Accurate Price Data
Collect current, accurate price data from reliable sources. For international comparisons, use prices from major cities in each country to ensure consistency. Be aware of seasonal variations, promotional pricing, and regional differences within countries. When possible, use average prices or prices from multiple locations to get a more representative sample. Remember that prices should be collected around the same time to ensure comparability.
3. Obtaining Current Exchange Rates
Use current market exchange rates from reliable financial sources. Be aware that exchange rates fluctuate constantly, so use rates from the same time period as your price data. For more stable analysis, consider using average exchange rates over a period (weekly or monthly) rather than spot rates. Remember that the calculator uses the rate of local currency per USD, so if 1 USD = 0.85 EUR, you enter 0.85.
4. Interpreting PPP Results
The PPP rate shows what the exchange rate should be if purchasing power parity held. Compare this to the actual market rate to assess currency valuation. If the PPP rate is higher than the market rate, the local currency is undervalued. If lower, it's overvalued. The difference percentage quantifies the degree of misalignment. Remember that PPP is a long-term concept - short-term deviations are normal and expected.