Purchasing Power Parity (PPP)

The core idea

Purchasing power parity (PPP) says that, in theory, an identical basket of goods should cost the same in two countries once you convert currencies. If a basket costs ₹100 in India and $2 in the US, the PPP exchange rate is ₹50 per dollar — regardless of what the market rate says. PPP adjusts for the fact that the same dollar buys far more in a low-price country like India than in a high-price one. It is why economists compare economies "at PPP" as well as at market exchange rates.

Why India looks so different at PPP

The gap between the two measures is stark for India. At market exchange rates, India's economy is roughly $4 trillion, around the fifth or sixth largest in the world. But at PPP, India is the third-largest economy on earth, behind only China and the United States, with output estimated near $19-20 trillion. The same goods and services, priced at India's lower domestic costs, simply add up to far more once you stop converting everything through an expensive dollar.

This also explains an apparent paradox: India ranks third by size at PPP yet far lower — around 140th — in per-capita income. A huge population producing at low local prices makes the total large but the average modest.

The Big Mac shortcut

The Economist's Big Mac Index is a playful one-good PPP test. In early 2026, a Big Mac cost roughly ₹226 in India against a higher dollar price in the US, implying the rupee is undervalued by more than half on a PPP basis. (India's index uses the chicken or paneer Maharaja Mac, since McDonald's sells no beef here — a reminder that the basket is never perfectly identical.)

Why it matters

PPP tells you a currency's underlying value can drift far from its market rate, and that low local prices make Indian incomes stretch further than dollar figures suggest. It is the right lens for comparing living standards and the real size of economies — but for trade, capital flows and your forex bill, the market rate is what you actually pay.