Introduction to PPP (Purchasing Power Parity)
Purchasing Power Parity In layman language
First of all, PPP is not perfect but it is a theoretical scaling instrument that helps us understand our salary difference using the exchange rates provided and cost of goods in the particular country.
In simpler terms, to calculate which things we can afford if our salaries remain the same in the same country where I want to buy things.
Let me clear your confusion by presenting you with an example here how it goes, Imagine you have a Sh 10,000 salary, you want to move abroad to the Timor-Leste, should you directly convert your currency to check how much you should be paid ?
Well actually No, let's check with a burger, check if the price of 🍔Burger is the same in the Timor-Leste as you have right now in Somalia. Even if you have tried to convert the price of it, you will find it slightly expensive or affordable so are you convinced now why exchange rates are not correct to check your salary.
So instead of checking exchange rates use Purchasing power parity values provided by 🌐World Bank, this index will guide and keep you informed about keeping inflation, expensive places in mind to negotiate it with your hr.
PPP index is used in salary conversion, if you move to a different country to evaluate you get the same value as you used to get in your motherland/work country to the country you moved or from the previous company to your country which can be expensive or lower as per exchange rate but as I said earlier it only converts the currencies.
Importance of PPP in economics
PPP is important because it helps us compare how well-off people are in different countries. It's like a fair way to see who can buy more with their money, regardless of the currency they use. It helps economists understand the standard of living and economic productivity across the globe.
Importance of PPP is very significant in economics to help economists, investors, enthusiasts and a closer check for governments also to check their ppp as it helps them understand how much affordability is there in a country. It also helps them understand -
- Fair way of checking all the countries where who can buy more with their money regardless of currency they use.
- Living standards across the nation.
- Economic productivity across the globe.
Understanding PPP Calculators
What is a PPP Calculator?
A PPP (Purchasing Power Parity) Salary Calculator by (Banksforyou) is a financial tool made to help job seekers, expatriates, employers, hr, economists, researchers and by IMF themselves to compare salaries or wages between different countries by taking into account the differences in the cost of living, simply to check if their current salary aligns with the local cost of living.
How PPP Salary Calculator Work?
A PPP (Purchasing Power Parity) salary calculator works by adjusting salaries or wages from one country to another considering the differences in the cost of living.
Let us check the breakdown of this-
- Salary Input - only numeric digits are allowed. Type the salary that you get in your current origin country i.e Somalia
- Input Boxes - one is the origin country and another is Target country. In your country, your current country you are living in and the salary you're expecting from Somalia and the salary that should align with the Timor-Leste. Select the countries from the boxes.
- Data Retrieval - Data provided by World bank is stored into our databases then retrieved from it and calculates the ppp based on the selected origin and target country. The formulae goes by this - Select the countries from the boxes.
Salary you get in Somalia (origin country) whole divided by total multiplication of (source country Somalia index value multiplied by Target country TLS index value provided by World Bank)
Salary (s)- Sh 10,000
Index Value of SOM (a)- 9285.779618
Index Value of TLS (b)- 0.513012621
(s) / ((a) * (b)) = $0.55
Uses of PPP Calculators
Cost of Living Comparison
This is how they can impact their cost of living standards by adjusting salaries based on the relative purchasing power of different currencies and locations.
- Standardizing Salary Comparisons
- Ensuring Fair Compensation
- Informing Relocation Decisions
- Budgeting and Financial Planning
- Negotiating Job Offers
And for companies it gives them a relative index value so they are aware of their costs and the expenses and their product launch price is also affected.
Benefits of Using a PPP Salary Calculator
A PPP (Purchasing Power Parity) salary calculator works by adjusting salaries or wages from one country to another considering the differences in the cost of living.
Let us check the breakdown of this-
- Estimated Cost of Living Comparison -
- Fair Compensation Practices -
- Effective Job Search -
PPP salary calculators help in understanding the difference and comparisons of salaries across different nations in context to your current country’s salary. Thus you can have an informed decision.
It ensures that employers will provide a living standard salary to the employee.
It is an absolutely great tool to search for a job and based on your skills and market rate in your country you can search salary ranges in other countries as well with this tool.
Disadvantages of using PPP Salary Calculator
- Accuracy Concerns -
- Non-monetary benefits are not calculated -
- Risk of Misinterpretation -
As the data depends on the salary entered and the current market conditions like inflation, disaster or any unexpected incident also sometimes due to use of non-latest index value. The data is fetched from the World Bank so if they have not collected the new data it is not possible to update to the latest year from our side.
Non monetary benefits such as training opportunities, career development courses or flexible work opportunities differ from person and places.
Misinterpretation of salary figures without considering crucial factors such as job satisfaction, work life balance or long term career growth.
Frequently Asked Questions
PPP in full form is Purchasing Power Parity is an Index which is prepared by the World Bank so as to check if the same item can be purchased with the same price or not across nations.
GDP measures the total value of goods and services produced within a country, reflecting its economic output using market exchange rates. PPP adjusted exchange rates to compare the purchasing power of different currencies, ensuring that identical goods and services have the same price when checked in a common currency.
Essentially, GDP focuses on the size and growth of an economy, while PPP provides a more accurate comparison of living standards and economic welfare between countries by considering differences in the cost of living and inflation rates such as production of the total number of burgers produced in Somalia vs price of Burger in Somalia Vs Timor-Leste
Per capita Income is the average income earned by the citizens of Somalia or Timor-Leste it can be calculated either by Per capita GDP or GDP per capita PPP.
- GDP per Capita - Total GDP of a country / its population. It indicates the economic output per person in a country.
- GDP per capita PPP - It is almost similar to GDP per Capita but instead of using nominal GDP it used PPP adjusted GDP. It provides more accurate data for calculating cost of living standards.