Educational Knowledge Base • 2026

Purchasing Power Parity (PPP) Terminology & Glossary

Understand all economic, salary negotiation, and cost-of-living terms in simple, plain English.

Core Concept

Purchasing Power Parity (PPP)

An economic theory and statistical metric that calculates the rate at which one currency would need to be converted into another to purchase an identical standardized basket of goods and services in both countries.

Practical Example: If a basket of food, housing, and healthcare costs $1,000 in the USA and ₹20,090 in India, the PPP rate is ₹20.09 per US Dollar.

Data Source

International Comparison Program (ICP)

The largest global statistical initiative in the world, managed by the World Bank, IMF, OECD, and UN. It collects millions of real retail price points across 200+ economies to calculate authoritative PPP conversion factors.

Practical Example: The World Bank indicator PA.NUS.PPP is derived directly from the ICP benchmark rounds.

Currency

Market Exchange Rate (Nominal FX)

The prevailing rate at which one currency can be traded for another on international foreign exchange markets. It is driven by trade balances, interest rates, capital flows, and speculation—not local living costs.

Practical Example: 1 USD = ~₹87.15 INR on foreign exchange markets, even though ₹20.09 buys the domestic equivalent of $1.00 in goods.

Cost of Living

Price Level Ratio (PLR)

The ratio of a country's PPP conversion factor to its market exchange rate (PPP ÷ FX). A PLR below 1.0 means the country's domestic price level is cheaper than the United States, while a PLR above 1.0 means it is more expensive.

Practical Example: India's PLR of ~0.23 means its general domestic price level is roughly 77% cheaper than the United States.

Macroeconomics

Balassa-Samuelson Effect

The economic principle explaining why service and labor costs are lower in developing countries. Higher productivity in developed nations drives up wages across all sectors (including non-tradable services), making hair cuts, rent, and dining much more expensive in rich nations.

Practical Example: A dental cleaning costs $200 in Seattle but only ₹1,500 ($17) in Bengaluru because local dentist labor is pegged to the domestic wage structure.

Consumption Basket

Tradable vs. Non-Tradable Goods

Tradable goods (laptops, phones, cars) can be shipped internationally and carry uniform global dollar prices. Non-tradables (rent, domestic help, plumbing, dining) cannot be shipped and reflect local labor rates.

Practical Example: An iPhone 16 Pro is a tradable good costing $1,199 everywhere, whereas a 3-bedroom apartment rental is a non-tradable good costing 75% less in India.

Informal Benchmark

Big Mac Index

A popular, simplified purchasing power parity index created by The Economist in 1986. It compares the retail price of a McDonald's Big Mac burger across countries to test if currencies are overvalued or undervalued.

Practical Example: If a Big Mac costs $5.80 in the US and ₹210 in India (Maharaja Mac), the implied Big Mac PPP rate is ~₹36.20/USD.

Remote Work

Pay Parity / Remote Compensation Multiplier

The localized salary adjustment formula used by global remote companies (e.g. GitLab, Buffer) to set fair compensation for international software engineers, designers, and knowledge workers.

Practical Example: Paying a US $120,000 role at a 40% remote band (₹40–48 Lakhs) in India provides the engineer with upper-decile local savings while saving the employer hiring capital.

Statistical Token

Local Currency Unit (LCU)

The official national currency used within an individual country (e.g. INR for India, GBP for the UK, AED for the UAE, CAD for Canada).

Practical Example: World Bank PPP factors are expressed as LCU per International Dollar.

Taxation

Take-Home Pay vs. Gross PPP

Gross PPP measures the purchasing power of pretax currency. Net take-home pay accounts for progressive income tax brackets, mandatory healthcare levies, and social security deductions.

Practical Example: A 0% income tax salary in Dubai provides higher net cash savings than a high-tax European salary with equivalent gross PPP.

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