Purchasing Power Parity

Purchasing power parity (PPP) is the idea that, in the long run, exchange rates should move so that a given basket of goods costs the same across countries when expressed in one currency. Arbitrage and trade tend to equalise real purchasing power. In practice, PPP holds only roughly and over long horizons — sticky prices, trade barriers, and non-traded goods create gaps. Founders use it to compare real wages and costs across regions, to judge if a currency is over- or under-valued for expansion, and to set international pricing. The lens: nominal comparisons mislead; adjust for local purchasing power when comparing costs, salaries, or market size.

Use PPP-adjusted data (e.g. from the World Bank or OECD) when comparing costs, wages, or market size across countries. For pricing, consider a PPP-based benchmark but allow for local elasticity and strategy. Don’t assume nominal exchange rates reflect long-run equilibrium — PPP deviations can persist and matter for entry and contracting.

PPP: exchange rates tend to equalise the real cost of a basket of goods across countries. Use PPP-adjusted data for cross-country comparison of costs, wages, and market size; don’t rely on nominal rates alone.