Purchasing Power Parity and Fair Comparisons

Converting every country's GDP into dollars at market exchange rates can mislead, because a dollar buys far more haircuts, bus rides and rice in Delhi than in Zurich. Purchasing power parity (PPP) adjusts for these price differences by asking how much it costs to buy the same basket of goods and services in each country. Non-traded services are especially cheap in poorer countries because wages are lower, so PPP figures usually raise their measured income relative to market-rate figures.

This changes rankings: measured at PPP, China's economy overtook the United States' in the mid-2010s, while at market exchange rates it remains smaller. Neither measure is simply right; market rates matter for buying imports, paying foreign debts or comparing global influence, while PPP better reflects domestic living standards. The adjustment depends on large international price surveys, so PPP estimates carry uncertainty and are revised when new surveys arrive.