ELI5: Explain Like I'm 5

purchasing power parity

Purchasing Power Parity (PPP) is a way to measure prices in different countries, to make sure that different people are paying about the same for the same products in different parts of the world. To explain it, let's use an example!

Let's say, you want to buy an ice-cream from the store and in one country it costs $5, but in another country it costs $10. With PPP, we can compare the prices to make sure you are getting the same amount of ice-cream for the same amount of money. We calculate this by comparing the prices of different goods and services between the two countries and then looking at what people are actually able to buy with their money.

For example if in one country, a person can buy 2 ice-creams for $5, but in another country, a person can only buy one ice-cream for the same amount of money, then the ice-cream in the second country costs twice as much. This means that people in the second country are paying more for the same product, and that's where PPP comes in. PPP tries to make sure that the same products cost about the same between countries, so everyone is getting the same amount for the same amount of money.