Purchasing Power Parity between different currencies

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Market exchange rates, we often use fail to express the real purchasing power of Rupee in India while expresssing India's GDP per capita income in Dollar terms. But we all know that Dollar will purchase  less commodities in USA than what we purchase in India.Thus, an alternate technique is needed to expres India's economic fundamentals while expressing them in terms of US dollar.Apart from factors like interest rates, inflation there is another economic variable which is critically most important for the economic health and progress of every country.  

An important term is the PPP (Purchasing Power Parity) method is indeed a typical tool to measure the same.. Under this method, purchasing power of currencies in different countries is used to measure exactly different economic indicators like GDP, Per capita income etc. PPP is defined as the number of units of a country's currency required to buy same amount of goods and services in domestic market as compared to one Dollar would buy in USA. This technique enables one to estimate what exchange is required to accuratly work out purchasing power of two currencies in their respective countries. 

Exchange rates are used to convert GDP in different currencies to a common currency. Purchasing Power parity (PPP) are the rates of currency conversion that try to equalise purchasing power of different curencies  by eliminating the differences in price levels in between countries.

It has been seen that market exchange rate doesn't reflect the purchasing power of a currency. For example, Rs,80 Lakhs earned in USA vs. Rs 23 lakhs in India. In other words, in order to match the lifestyle one spends Rs 23 lakhs per annum in India, Rs 80 lakhs is needed in USA to match the same. Factors which give negative results to the effectiveness of PPP are - Govt.intervention, transport costs,Tax differences, Non tradedvservices, Market competition. 

While it is not a perfect measurement metric, PPP does allow the possibility of comparing prices between countries that have different currencies. The absolute formula is by multiplying the cost of a produci or service with the first currency by the price of the same goods or services in other currency/


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