What Purchasing Power Parity measures
Purchasing Power Parity (PPP) is the idea that identical goods should cost the same amount once converted into a common currency. Comparing the PPP-implied exchange rate to the actual market exchange rate is a simple way to gauge whether a currency looks over- or undervalued, similar in spirit to the well-known Big Mac Index.
The formula
The implied PPP exchange rate is calculated as Price in Foreign Currency ÷ Price in Home Currency for the same basket of goods. Comparing that to the actual market exchange rate with (Market Rate – PPP Rate) ÷ PPP Rate × 100% shows the valuation gap: a positive result suggests the home currency buys more abroad than the market rate implies (undervalued), while a negative result suggests the opposite (overvalued).
Real exchange rates are affected by trade costs, taxes, capital flows, and non-tradable goods, so PPP comparisons are a rough long-run benchmark rather than a short-term trading signal. This tool is for general economics education and planning.