What Does PPP ( Purchasing Power Parity ) Mean?
Purchasing Power Parity or PPP refers to an economic theory that compares the economic productivity and living standards of different countries using the basket of goods approach. Accordingly, two countries are said to be at equilibrium when the basket of goods is priced the same in both countries, accounting for the exchange rates. It can be expressed as,
S = P1 / P2 Where,
S = Exchange rate of one currency 1 to currency 2 P1 = Cost of a good in currency 1 P2 = Cost of the same good in currency 2
Uses Of PPP
· Helps in comparison of Gross Domestic Products and Price Level Indices of different countries. · The PPP exchange rates are used to convert the national poverty lines into Global Poverty Lines. · It is a more accurate means of estimating the nation's domestic market because it takes into account the relative cost of local goods, services and inflation rates of the country. · These estimates are used by the United Nations in constructing the Human Development Index (HDI).
Estimation Of PPP
· The World Bank released statistics regarding the PPP for countries across the world under International Comparison Program (ICP) that adjusts for differences in the cost of living across economies of the world. · In India, the Ministry of Statistics and Programme Implementation is responsible for providing this information.
India’s Position in The World With Respect To PPP
· India is the third largest economy in terms of PPP. It follows the United States and China. The reference year for the same is 2017. · However, its share in the global GDP is merely 6.7%, as opposed to the 16.4% share of China and 16.3% of the United States. · India is also the second-largest economy in terms of its PPP-based share in regional actual individual consumption and regional gross capital formation i.e. with respect to Asia Pacific.
