PPS decoding: How to understand the real value of money in different countries

Practitioner’s Guide | Reading time: 7 minutes

Key Principles

• Purchasing Power Parity (PPP) — is a method of valuing currencies based on what you can actually buy with money in each country
• PPP decoding and application are critical for analyzing real GDP, economic well-being, and living standards of populations
• In the cryptocurrency market, PPP explains why users in countries with currency devaluation and high inflation are more actively adopting digital assets and stablecoins to protect savings

Why Understanding PPP Will Change Your View of the Economy

Imagine: your salary in Canada is $4,000 per month, while colleagues in Thailand earn the equivalent of $800. Who is truly wealthier? The answer depends on purchasing power parity (PPP) — a fundamental tool for comparing the real value of money across borders.

PPP solves a simple but powerful problem: it ignores nominal exchange rates and asks — what can you really spend your money on? This flips traditional notions of economic well-being.

How PPP Works in Practice

PPP is based on the law of one price: if markets are efficient, the same product should cost the same everywhere, considering exchange rates.

Here’s how it works with a concrete example:

A smartphone costs $500 USD and ¥55,000 in Japan. Applying PPP, the theoretical fair exchange rate is 1 USD = ¥110. If the actual rate differs (say, 1 USD = ¥100), it signals: one currency is overvalued, the other undervalued.

But real life is more complex. Taxes, shipping, customs duties, local demand distort the picture. Therefore, instead of a single product, economists analyze a whole basket of goods: food, clothing, housing, utilities. This provides a more honest picture of what money can buy within each economy.

Four Reasons Why PPP Decoding Matters

1. Overestimating economic size: GDP by PPP

Nominal GDP can be misleading. A country with a low dollar GDP might be much wealthier after PPP adjustment.

Example: India’s GDP per capita looks modest in dollar terms. But converting via PPP shows that people there can afford much more than it first appears.

2. Real comparison of living standards

A salary of $1,000 in Nigeria and $1,000 in Norway is not the same. PPP shows what you can actually buy and how comfortably you live. It explains the paradox: why someone with a low nominal income can maintain a stable lifestyle.

3. Detecting currency manipulation

States sometimes artificially undervalue or overvalue exchange rates to create an impression of economic strength. PPP reveals this game: if a currency is actually over- or undervalued relative to real purchasing power, it’s immediately visible.

4. Predicting currency movements

Short-term exchange rates fluctuate due to speculation and political events. But over the long term, currencies tend toward PPP. Professional forecasters use PPP as an anchor for long-term predictions.

Popular Methods of Measuring PPP: from Big Mac to iPad

Economists love popularizing PPP through fun indices:

Big Mac Index (created by The Economist) — one of the most famous. Since a burger is the same everywhere, its local price becomes an indicator of the currency rate. A Big Mac costing $5 in the US and $3 in India hints that the Indian rupee is likely undervalued.

Similarly, the iPad Index and KFC Index are standardized global products used to assess PPP in an accessible way.

Where PPP Fails: Real Limitations

Despite its universality, PPP has weaknesses:

• Quality varies: goods look the same but quality differs. Fabric of a shirt, durability of tech — all affect actual value.

• Non-tradable services: haircuts, rent, repairs — are not sold on the global market. Their prices vary greatly by country and are hard to compare.

• Inflation distorts calculations: PPP assumes relative stability. In countries with 50% annual inflation, calculations quickly become outdated.

• Consumer habits differ: residents of Norway and Bangladesh buy different sets of goods. A single “basket” isn’t universal.

PPP and the Cryptocurrency Market: An Unexpected Connection

PPP doesn’t directly relate to Bitcoin and Ethereum, but its influence is huge:

Why crypto booms in countries with currency devaluation

Cryptocurrencies know no borders. But for a user in a country with currency deflation, entering crypto is much more expensive. PPP explains the increased adoption of crypto in Argentina, Nigeria, Venezuela: people seek to escape local currency devaluation.

Stablecoins as a tool for preserving value

USDT and USDC are pegged to the dollar and protect against devaluation. From a PPP perspective: stablecoins preserve purchasing power when the national currency falls. This is especially critical in unstable economies.

Practical application: when to convert to crypto

PPP helps users decide: is it advantageous to convert local currency into digital assets? For savings? Transfers? Trading? Understanding PPP makes this choice more justified.

Conclusion: PPP — a Window into the Real Economy

Purchasing Power Parity is not just an academic theory. It’s a way to see the global economy honestly, without the gloss of nominal exchange rates.

Its applications are vast: from recalculating global GDP to explaining crypto adoption in emerging markets. Whether you’re an economist, investor, or just interested in finance, PPP decoding provides tools to understand how money truly works around the world — and why digital assets are becoming increasingly attractive amid currency devaluation.