Purchasing Power Parity (PPP)

Purchasing Power Parity (PPP) is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries so that an exchange can be made that will equate the purchasing power of each country's currency. This results in the ability for the purchasing power of different currencies to be comparable in terms of their ability to purchase the same basket of goods.

The PPP calculation takes a price of an item (or basket of goods) in the home country (homePrice) and divides it by the product of the price of the same item in the foreign country (foreignPrice) and the existing exchange rate (exchangeRate), giving an indication of the relative value of the two currencies.

Practically, the PPP is useful for macroeconomic comparisons of wealth between countries. It can be used to compare the cost of living between countries, and it's often used by international businesses and organizations to set economic policy or adjust salaries for employees working internationally.