I just realized something quite interesting: why is a Big Mac in the U.S. twice as expensive as in India? The answer lies in the concept of Purchasing Power Parity — a tool used by economists to compare the actual strength of different currencies.

Simply put, PPP helps us understand: with the same amount of money, how much goods can you buy in different countries/regions? It’s not just dry economic theory but has very practical applications in everyday life.

The basis of PPP is the so-called law of one price. This theory states that if there are no trade barriers, the same product, after adjusting for exchange rates, should have comparable prices everywhere. For example: a phone costing $500 in the U.S. and 55,000 yen in Japan, the ideal exchange rate would be 1 USD = 110 yen. But reality is much more complex due to taxes, transportation costs, local demand. That’s why economists don’t just look at a single product but track a basket of goods — food, clothing, housing, energy — to better understand actual PPP.

Why is this important? It directly affects how we evaluate a country’s economy. When looking at GDP per capita, if not adjusted for PPP, India appears very poor. But when adjusted for PPP (considering lower living costs), the picture changes — the actual standard of living becomes easier to compare. The IMF and the World Bank both use PPP-adjusted GDP to more accurately describe global wealth distribution.

A useful application is comparing living standards. Earning the same $50,000 a year, one place might allow a comfortable life, while another only enough to survive. Or predicting long-term exchange rates — over time, the trend of exchange rates tends to move closer to what PPP indicates. Even when governments adjust official rates, PPP becomes a tool to verify whether those rates reflect real value.

The Big Mac index is a classic example. The Economist created it based on a simple idea: Big Macs are similar across countries, so comparing their prices across nations/regions is a quick way to understand PPP. If a Big Mac costs $5 in the U.S. but only $3 in India, that reflects currency valuation. Over time, additional indices like the iPad index, KFC index — using everyday products to explain PPP in an easy-to-understand way — have emerged.

But PPP isn’t perfect. One issue is product quality may differ — a shirt that looks the same in two countries might not be of the same quality, and thus priced differently. There are also non-tradable goods and services like real estate or local services (haircuts, electricity), where price differences can be huge depending on the location. Additionally, inflation can break all assumptions — the comparison method today might become outdated after just a few months.

And there’s another interesting aspect: links to digital currencies. Bitcoin and other cryptocurrencies are global assets, not tied to any specific country or region. But in countries with weak currencies (based on PPP), the cost to buy cryptocurrencies is higher, making them a hedge against currency devaluation. This is especially common in hyperinflationary environments. In countries with weak or highly inflationary currencies, stablecoins help people maintain PPP, becoming practical financial tools. Of course, stablecoins also carry risks, and accurate PPP can help determine whether converting local currency into stablecoins is advantageous.

Overall, PPP is a powerful tool to understand global prices, income, and economies. Although imperfect, it creates a fair environment for comparing economic strength across countries/regions. Whether you’re an economist predicting exchange rates, a company strategizing pricing, or just a curious traveler wondering why foreign goods are cheaper (or more expensive), PPP can be very helpful.