Purchasing Power Parity

The mechanism by which prices are measured across different nations, a rather tedious but occasionally useful endeavor, is known as purchasing power parity (PPP). It’s essentially a way to compare the actual cost of a specific set of goods and services in one country versus another, attempting to bypass the often-unreliable fluctuations of market exchange rates. Think of it as finding the true cost of living, stripped of the silliness that tariffs, arbitrary taxes, and the general chaos of international trade impose.

Measure of Prices in Different Countries

Purchasing power parity (PPP) is a quantitative assessment of the price of a carefully curated selection of goods in various countries. Its primary function is to provide a more accurate comparison of the genuine purchasing power of different currencies. At its core, PPP is the ratio derived from dividing the price of a predetermined market basket of goods in one geographical location by the price of the identical basket in another. This metric is vital because it can diverge significantly from the market exchange rate, often due to the interference of tariffs, other transaction costs, and the general inefficiencies of moving goods across borders.

Beyond simple price comparisons, the PPP indicator serves a crucial role in evaluating economies on a broader scale. It allows for comparisons of gross domestic product (GDP), labor productivity, and individual consumption levels. In certain contexts, PPP analysis can also shed light on price convergence trends and provide a more nuanced understanding of the cost of living across different regions. The OECD, a rather diligent organization when it comes to such matters, outlines its calculation method: a comprehensive "final product list" comprising approximately 3,000 consumer goods and services, 30 different occupations within the government sector, about 200 types of equipment goods, and roughly 15 construction projects. It’s a rather exhaustive inventory, if you ask me, but then again, precision is often the enemy of brevity.

PPP by Country (Territory) in 2022 (IMF)

For those who find solace in numbers, the International Monetary Fund (IMF) provides data on PPP by country for the year 2022. It's a snapshot, of course, and like most snapshots, it captures a moment without revealing the entire story. Still, it's the closest thing to a definitive measure we have for these rather abstract economic comparisons.

Concept

The concept of purchasing power parity (PPP) is fundamentally an economic principle designed to equalize price levels across different geographic locations. It's rooted in the more idealistic notion of the law of one price, which posits that in a frictionless world—devoid of transaction costs or trade barriers—an identical good should command the exact same price everywhere. Theoretically, a laptop purchased in New York should cost precisely the same as an identical model in Hong Kong, once converted to a common currency. If, for instance, that laptop is $500 in New York and 4,000 Hong Kong dollars in Hong Kong, the PPP exchange rate would suggest a 1:8 ratio (4,000 HKD to 500 USD). This, of course, is an oversimplification, as reality rarely adheres to such elegant theoretical constructs.

This mechanism bears a resemblance to the consumer price index (CPI). As Professor D. S. Prasada Rao of the University of New England (Australia) aptly puts it, "The CPI measures differences in levels of prices of goods and services over time within a country, whereas PPPs measure the change in levels of prices across regions within a country." Essentially, CPI tracks inflation domestically, while PPP attempts to harmonize price levels internationally.

However, the real world is a messy place. Factors like poverty, the imposition of tariffs, transportation expenses, and a myriad of other "frictions" disrupt the seamless flow of goods and services. Measuring the price of a single item can therefore lead to significant inaccuracies. This is precisely why the PPP concept relies on a basket of goods—a collection of diverse items in specific quantities. PPP then calculates an inflation and exchange rate as the ratio of the total cost of this basket in one location compared to another. For example, imagine a basket containing one computer, a ton of rice, and half a ton of steel. If this basket costs $1,000 in New York and 6,000 Hong Kong dollars in Hong Kong, the PPP exchange rate would be 6 HKD to 1 USD. It’s a more robust, albeit still imperfect, approach.

The very name, "purchasing power parity," implies that at this theoretical exchange rate, individuals in different locations would possess equivalent purchasing power.

The precise value of a PPP exchange rate is inherently sensitive to the selection of the basket of goods. Ideally, items are chosen that are believed to adhere closely to the law of one price—goods that are readily traded and widely available across different markets. It’s a delicate balancing act, and organizations that compute these rates often employ different baskets, leading to variations in their findings.

It is crucial to understand that the PPP exchange rate is not necessarily the same as the market exchange rate. The market rate is a far more volatile entity, swayed by immediate shifts in supply and demand. Furthermore, factors such as tariffs and disparities in labor costs (as illuminated by the Balassa–Samuelson theorem) can create persistent deviations between the two rates over the long term. Nevertheless, PPP offers a valuable tool for forecasting longer-term exchange rate trends.

Given their relative stability and reduced susceptibility to tariffs, PPP exchange rates are frequently employed for international comparisons, particularly when assessing national economies, such as GDPs or other indicators of national income. Figures adjusted for PPP are often flagged as "PPP-adjusted" or expressed in "PPP" currencies.

The divergence between incomes adjusted by PPP and those converted using market exchange rates can be substantial. A notable example is the Geary–Khamis dollar, often referred to as the GK dollar or international dollar. The World Bank's "World Development Indicators 2005" report estimated that in 2003, one Geary–Khamis dollar held purchasing power equivalent to approximately 1.8 Chinese yuan, a figure considerably different from the prevailing nominal exchange rate. These discrepancies have profound implications. For instance, when converted using nominal exchange rates, GDP per capita in India was around US $1,965, but on a PPP basis, it soared to approximately Int$ 7,197. Conversely, Denmark's nominal GDP per capita stood at roughly US $53,242, while its PPP figure was Int$ 46,602, aligning it more closely with other developed nations.

Variations

The calculation of PPP is not a monolithic process; variations exist. The EKS method, developed by Ö. Éltető, P. Köves, and B. Szulc, utilizes the geometric mean of exchange rates calculated for individual goods. A further refinement, the EKS-S method (attributed to Éltető, Köves, Szulc, and Sergeev), employs two distinct baskets, one for each country, and then averages the results. While effective for bilateral comparisons, applying these methods to three or more countries can lead to inconsistencies, necessitating further adjustments to ensure the rate between currency A and B, when multiplied by the rate between B and C, equals the direct rate between A and C.

Relative PPP

Relative purchasing power parity represents a more relaxed assertion, derived from the law of one price, focusing on the interplay between changes in exchange rates and inflation. It tends to track the exchange rate more closely than its absolute counterpart.

Usage

Conversion

The purchasing power parity exchange rate is particularly useful when comparing national production and consumption, and in other scenarios where the prices of non-traded goods are deemed significant. Market exchange rates, on the other hand, are more pertinent for individual traded goods. PPP rates, being more stable over time, are preferred when this attribute is paramount.

While PPP exchange rates can be helpful for costing purposes, they often exclude profits and, more critically, fail to account for variations in the quality of goods across countries. The same product might exhibit different quality standards or even safety levels in different nations, alongside differing tax structures and transportation costs. Because market exchange rates are notoriously volatile, converting a country's GDP using these rates can lead to misleading inferences. One year, a country might appear wealthier than another, only for the situation to reverse in the subsequent year, neither scenario accurately reflecting their relative production capacities.

Employing PPP exchange rates instead of market rates for GDP conversions prevents these erroneous conclusions. In essence, GDP measured at PPP adjusts for differing costs of living and price levels, typically relative to the United States dollar, thereby offering a more precise estimate of a nation's productive output.

The exchange rate, as observed in international markets, reflects transaction values for traded goods between countries, as opposed to non-traded goods—those produced and consumed domestically. Furthermore, currencies are traded for reasons beyond the exchange of goods and services; for instance, the acquisition of capital assets, whose prices can fluctuate more dramatically than those of physical goods. Additionally, differential interest rates, speculation, hedging, and interventions by central banks can all influence a country's purchasing power parity in the international arena.

The PPP method is also employed as an alternative strategy to mitigate potential statistical biases. The Penn World Table, a widely referenced source for PPP adjustments, and the related Penn effect highlight a systematic bias that arises when using exchange rates to compare outputs across countries.

Consider this: if the value of the Mexican peso halves in relation to the US dollar, Mexico's gross domestic product expressed in dollars would also halve. However, this exchange rate is a product of international trade and financial markets, not necessarily an indicator of a reduction in Mexicans' overall well-being. If incomes and domestic prices remain unchanged, their purchasing power within Mexico would be unaffected, assuming imported goods aren't critical to their quality of life.

Measuring income across different countries using PPP exchange rates helps circumvent this issue, providing insight into relative wealth concerning local goods and services within domestic markets. Conversely, it proves less effective for gauging the relative cost of goods and services on international markets. This is because it fails to capture how much US$1 truly represents in a given country. Using the earlier example, after the peso's devaluation, Mexicans could purchase less on the international market than Americans, even if Mexico's GDP adjusted for PPP remained relatively stable.

Exchange Rate Prediction

While PPP exchange rates are not always perfectly reflective of current market valuations, they do offer a valuable long-term perspective. Market exchange rates tend to gravitate towards their PPP counterparts over extended periods. Understanding the general direction of these long-term movements can be quite informative.

Within the framework of neoclassical economic theory, the purchasing power parity theory posits that the exchange rate observed in international markets is the one that should be used for PPP comparisons, ensuring that an equivalent amount of funds could purchase the same quantity of goods in either currency. Depending on the specific theoretical model, PPP is assumed to hold either in the long run or, more stringently, in the short run. Theories invoking PPP often suggest that a decline in a currency's purchasing power (i.e., a rise in its price level) would, under certain circumstances, lead to a proportional decrease in its valuation on the foreign exchange market.

Identifying Manipulation

PPP exchange rates are particularly invaluable when official exchange rates are subject to artificial manipulation by governments. Nations exercising strong governmental control over their economies may enforce official exchange rates that artificially bolster their currency. Conversely, the currency's black market rate might be artificially depressed. In such scenarios, a PPP exchange rate often provides the most realistic basis for economic comparison. Similarly, when exchange rates deviate significantly from their long-term equilibrium due to speculative attacks or carry trades, a PPP exchange rate offers a more reliable benchmark for analysis.

As a notable instance, the Big Mac Index was employed in 2011 to detect alleged manipulation of inflation figures by Argentina.

Issues

The calculation of PPP exchange rates is not without its controversies, primarily stemming from the inherent difficulties in identifying truly comparable baskets of goods for cross-country purchasing power assessments.

The estimation of purchasing power parity is complicated by the fact that countries don't simply exhibit uniform price level differences. For example, the disparity in food prices might be more pronounced than that for housing, yet less significant than the difference in entertainment costs. Moreover, consumption patterns vary considerably across populations. Consequently, it becomes necessary to compare the costs of diverse baskets of goods and services using a price index. This task is inherently challenging due to differing purchasing habits and the very availability of goods in various countries.

This necessitates adjustments for variations in the quality of goods and services. Furthermore, a basket of goods representative of one economy will likely differ from that of another; Americans might consume more bread, while Chinese consumers prefer rice. Thus, a PPP calculated using US consumption as a benchmark will naturally differ from one based on Chinese consumption patterns. Additional statistical complexities arise in multilateral comparisons involving more than two countries.

Various methods for averaging bilateral PPPs can yield more stable multilateral comparisons, but often at the expense of distorting bilateral relationships. These are common issues in index construction; as with any price index, reducing such complexity to a single, universally satisfactory number is an elusive goal. Nevertheless, PPPs generally demonstrate robustness when confronted with the numerous challenges inherent in using market exchange rates for comparative purposes.

For illustration, in 2005, the price of a gallon of gasoline in Saudi Arabia was US $0.91, while in Norway it was US$ 6.27. These significant price discrepancies, while illustrative of cost variations, do not inherently contribute to the accuracy of a PPP analysis without considering the myriad variables that drive such differences. A comprehensive PPP formulation requires the aggregation and analysis of numerous such comparisons.

When PPP comparisons span a period of time, it is imperative to adequately account for inflationary effects.

Beyond the methodological challenges in selecting a basket of goods, PPP estimates can also be influenced by the statistical capabilities of the participating countries. The International Comparison Program (ICP), which forms the basis for PPP estimates, requires the disaggregation of national accounts into production, expenditure, or (in some cases) income categories. Not all participating countries routinely provide data in such detailed formats.

Certain aspects of PPP comparison present theoretical impossibilities or ambiguities. For instance, comparing the Ethiopian laborer subsisting on teff with the Thai laborer living on rice poses a challenge. Since teff is not commercially available in Thailand and rice is not readily found in Ethiopia, the price of rice in Ethiopia or teff in Thailand cannot be determined. As a general principle, the greater the similarity in price structures between countries, the more valid the PPP comparison.

PPP levels can also fluctuate depending on the specific formula used to calculate price matrices. Common formulas include GEKS-Fisher, Geary-Khamis, IDB, and superlative methods, each with its own set of advantages and disadvantages.

The process of linking regions introduces further methodological difficulties. In the 2005 ICP round, regions were compared using a list of approximately 1,000 identical items for which prices could be obtained in 18 countries, selected to ensure at least two countries per region. While an improvement over earlier "bridging" methods that did not fully account for quality differences, this approach might overstate the PPP basis for poorer countries. This is because the price indexing, upon which PPP is founded, tends to assign greater weight to goods consumed in larger proportions in richer countries.

Several factors contribute to PPP measures not perfectly reflecting the standard of living. In 2011, a spokesperson for the IMF, in an interview with the Financial Times, stated:

The IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally. The IMF believes that GDP at market rates is a more relevant comparison.

— International Monetary Fund spokesperson, Webber, Jude (2011). China's rise, America's demise. Financial Times.

Range and Quality of Goods

The "power" of a currency is determined by the basket of goods it can purchase, encompassing a variety of types:

Local, non-tradable goods and services: These are items like electric power, produced and consumed domestically.
Tradable goods: These include non-perishable commodities such as diamonds that can be sold on the international market.

The more a product falls into the first category, the more its price will diverge from the currency exchange rate, moving closer to the PPP exchange rate. Conversely, category 2 products tend to trade closer to the currency exchange rate. (Refer to Penn effect for further details.)

More processed and expensive products are more likely to be tradable, thus belonging to the second category and exhibiting prices closer to the currency exchange rate than the PPP rate. Even if the PPP "value" of an Ethiopian currency is three times stronger than its currency exchange rate, it won't translate to purchasing three times the quantity of internationally traded goods like steel, cars, or microchips. Instead, this advantage applies to non-traded goods such as housing, services ("haircuts"), and domestically produced crops. The relative price differential between tradables and non-tradables, from high-income to low-income countries, is a consequence of the Balassa–Samuelson effect. This effect provides a significant cost advantage to labor-intensive production of tradable goods in low-income countries (like Ethiopia) compared to high-income countries (like Switzerland).

This corporate cost advantage is essentially derived from access to cheaper labor. However, because the earnings of these workers stretch further in low-income countries, the relative pay differentials between countries can be sustained for longer than might otherwise be the case. This implies that wage rates are often based on average local productivity, which may be lower than the per capita productivity achieved by factories exporting tradable goods to international markets. An equivalent cost benefit arises from non-traded goods sourced locally, which are priced nearer the PPP exchange rate than the nominal exchange rate used for receipts. These serve as a less expensive factor of production compared to what factories in wealthier countries can access. It is challenging for GDP PPP calculations to adequately capture the differing quality of goods across nations.

The Bhagwati–Kravis–Lipsey view offers a perspective that diverges slightly from the Balassa–Samuelson theory. This view suggests that price levels for non-tradables are lower in poorer countries due to differing endowments of labor and capital, rather than simply lower productivity. Poorer nations tend to have a higher ratio of labor to capital, which consequently increases the marginal productivity of labor in richer countries relative to poorer ones. Given that non-tradables are often labor-intensive, and labor is less expensive in poorer countries where it is primarily employed for non-tradables, these non-tradables become cheaper in those nations. Conversely, wages are higher in rich countries, making non-tradables relatively more expensive.

PPP calculations often place undue emphasis on the primary sector's contribution to an economy, while underestimating the significance of the industrial and service sectors.

Trade Barriers and Nontradables

The law of one price is inherently weakened by transportation costs and governmental trade restrictions, which increase the expense of moving goods between markets in different countries. These transport costs sever the direct link between exchange rates and the prices of goods that the law of one price would predict. As transportation costs escalate, so too does the potential range of exchange rate fluctuations. The same principle applies to official trade barriers, as customs duties impact importers' profits in a manner analogous to shipping fees. According to Krugman and Obstfeld, "Either type of trade impediment weakens the basis of PPP by allowing the purchasing power of a given currency to differ more widely from country to country." They aptly illustrate this with the example that a dollar in London should theoretically purchase the same goods as a dollar in Chicago, a proposition that is demonstrably untrue in practice.

Nontradables, primarily services and the output of the construction industry, also contribute to deviations in PPP. This is because the prices of nontradables are not subject to international market forces. Their prices are dictated by domestic supply and demand dynamics, and shifts in these curves can alter the relative cost of a market basket of goods compared to the foreign price of an identical basket. If the prices of nontradables rise within a country, the purchasing power of any given currency in that nation will consequently fall.

Departures from Free Competition

The linkages between national price levels are further attenuated by the interplay of trade barriers and imperfectly competitive market structures. Pricing to market occurs when a firm sells the same product at different prices in distinct markets. This phenomenon reflects inter-country variations in both demand-side conditions (e.g., minimal demand for pork in Islamic states) and supply-side factors (e.g., whether an existing market for a potential entrant's product is dominated by a few suppliers or is already saturated). Krugman and Obstfeld argue that this combination of product differentiation and segmented markets leads to violations of both the law of one price and absolute PPP. Over time, shifts in market structure and demand can invalidate relative PPP as well.

Differences in Price Level Measurement

The measurement of price levels varies significantly from country to country. Inflation data compiled by different nations are based on distinct commodity baskets; consequently, changes in exchange rates do not always offset official measures of inflation differentials. Because it focuses on predictions of price changes rather than absolute price levels, relative PPP retains its utility as a concept. However, fluctuations in the relative prices of basket components can cause relative PPP to fail tests based on official price indexes.

Global Poverty Line

The global poverty line represents a worldwide quantification of individuals residing below an international poverty line, often referred to as the dollar-a-day benchmark. This line is derived from an average of the national poverty lines of the world's poorest countries, expressed in international dollars. These national poverty lines are converted into international currency, and the global line is then reconverted into local currency using PPP exchange rates from the ICP. A critical issue here is that PPP exchange rates incorporate data from the sale of high-end, non-poverty-related items, which can skew the valuation of food items and essential goods that constitute a significant portion (around 70 percent) of the consumption of impoverished populations. Angus Deaton contends that PPP indices require reweighting for poverty measurement purposes. They should be redefined to reflect local poverty standards, not global ones, by giving greater weight to local food items and excluding luxury goods that are not widely prevalent or hold equal value across all localities.

History

The foundational concept of purchasing power parity can be traced back to the 16th-century School of Salamanca. In 1802, Henry Thornton articulated what is considered the first clear explanation of the self-regulating mechanism that maintains exchange rates close to their purchasing power parity in his work, Paper Credit. In 1807, John Wheatley expanded upon Thornton's analysis, presenting an "extreme monetarist version of the PPP doctrine," which was subsequently embraced by prominent figures like David Ricardo, Walter Boyd, and the influential Bullion Report of 1810. Later, in 1912, Ludwig von Mises established a modern formulation of the PPP theory of exchange rates in his book, The Theory of Money and Credit. In 1913, Ralph Hawtrey provided a concise and precise statement of the doctrine.

Despite these earlier contributions, Gustav Cassel is frequently credited with developing the PPP concept, particularly through his influential 1916 papers in The Economic Journal, titled "The Present Situation of the Foreign Exchanges." In 1918, he introduced the actual phrase "purchasing power parity" in another article published in The Economic Journal, "Abnormal Deviations in International Exchanges." While Cassel's engagement with the PPP concept is often interpreted as an attempt to formulate a positive theory of exchange rate determination, the broader policy and theoretical context of his writings suggests a different interpretation. In the period surrounding the end of World War I and its aftermath, economists and policymakers were intensely discussing methods for restoring the gold standard, which would automatically re-establish a system of fixed exchange rates among participating nations.

The stability of exchange rates was widely perceived as essential for the revival and sustained growth of international trade. The notion that flexible exchange rates, determined by market forces, could operate without causing chaos and instability during peacetime—a consequence often attributed to the abandonment of the gold standard during the war—was not yet widely accepted. Cassel, while supporting the restoration of the gold standard, albeit with modifications, sought to determine the appropriate level at which exchange rates should be fixed. His objective was not to describe how exchange rates are determined in a free market, but rather to provide a benchmark for policy decisions in the context of returning to a fixed exchange rate system.

His recommendation was to anchor exchange rates at their PPP level, believing this would prevent trade imbalances between nations. Thus, Cassel's PPP doctrine was less a descriptive theory of exchange rate determination and more a prescriptive policy recommendation, formulated within the discussions surrounding the return to the gold standard. He was fully aware that numerous factors could cause exchange rates to deviate from PPP levels in a floating system.

Calculating PPP Factors

Professional

See also: List of countries by price level

The Organisation for Economic Co-operation and Development (OECD) undertakes monthly measurements of price level differences among its member countries. This is achieved by calculating the ratios of PPPs for private final consumption expenditure to prevailing exchange rates. The OECD table below illustrates the amount of US dollars required in various listed countries to purchase the same representative basket of consumer goods and services that would cost US$100 in the United States.

According to the table, an American residing or traveling in Switzerland would find it the most expensive country among the group, needing to spend 27% more US dollars to maintain a standard of living comparable to that in the US, in terms of consumption.

Country	Price level 2015 (US = 100)	Price level 2024 (US = 100)
Australia	123	96
Austria	99	82
Belgium	101	84
Canada	105	90
Chile	67	52
Colombia	No Data	44
Costa Rica	No Data	67
Czech Republic	59	63
Denmark	128	105
Estonia	71	74
Finland	113	92
France	100	80
Germany	94	80
Greece	78	63
Hungary	52	55
Iceland	111	119
Ireland	109	104
Israel	109	105
Italy	94	73
Japan	96	69
South Korea	84	69
Latvia	No Data	64
Lithuania	No Data	59
Luxembourg	112	98
Mexico	66	65
Netherlands	102	84
New Zealand	118	93
Norway	134	92
Poland	51	51
Portugal	73	64
Slovakia	63	66
Slovenia	75	66
Spain	84	69
Sweden	109	87
Switzerland	162	127
Turkey	61	31
United Kingdom	121	95
United States	100	100

Extrapolating PPP Rates

Since global PPP estimates, such as those provided by the ICP, are not calculated annually but for a designated benchmark year, PPP exchange rates for other years must be extrapolated. One common method involves utilizing a country's GDP deflator. The calculation for a country's PPP exchange rate in Geary–Khamis dollars for a specific year proceeds as follows:

{\textrm {PPPrate}}_{X,i}={\frac {{\textrm {PPPrate}}_{X,b}\cdot {\frac {{\textrm {GDPdef}}_{X,i}}{{\textrm {GDPdef}}_{X,b}}}}{{\textrm {PPPrate}}_{U,b}\cdot {\frac {{\textrm {GDPdef}}_{U,i}}{{\textrm {GDPdef}}_{U,b}}}}}

Where:

$PPPrate_{X,i}$ represents the PPP exchange rate of country X for year $i$ .
$PPPrate_{X,b}$ is the PPP exchange rate of country X for the benchmark year.
$PPPrate_{U,b}$ is the PPP exchange rate of the United States (US) for the benchmark year (equaling 1).
$GDPdef_{X,i}$ is the GDP deflator of country X for year $i$ .
$GDPdef_{X,b}$ is the GDP deflator of country X for the benchmark year.
$GDPdef_{U,i}$ is the GDP deflator of the US for year $i$ .
$GDPdef_{U,b}$ is the GDP deflator of the US for the benchmark year.

UBS

The bank UBS publishes its "Prices and Earnings" report every three years. The 2012 edition stated, "Our reference basket of goods is based on European consumer habits and includes 122 positions."

Simplified

To convey the intuition and calculation of PPP factors more readily, the basket of goods is often simplified to a single item.

Big Mac Index

Main article: Big Mac Index

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Big Mac hamburgers, much like this one from Japan, are remarkably similar worldwide.

The Big Mac Index is a straightforward implementation of PPP, wherein the basket comprises a single good: a Big Mac burger from McDonald's restaurants. This index was conceived and popularized by The Economist in 1986, serving as an accessible pedagogical tool for economics and a means to identify overvalued and undervalued currencies.

The Big Mac's value as an index component lies in its status as a relatively standardized consumer product, incorporating input costs from a broad spectrum of the local economy. This includes agricultural commodities (beef, bread, lettuce, cheese), labor (both blue- and white-collar), advertising, rent and real estate costs, transportation, and more.

However, the Big Mac Index is not without its limitations. A Big Mac is perishable and not easily transported, which means the law of one price is unlikely to ensure identical prices across different locations. Furthermore, McDonald's restaurants are not ubiquitous; their absence in certain countries limits the index's global comprehensiveness. Additionally, Big Macs are not sold at every McDonald's outlet (most notably in India), further restricting its applicability.

In a white paper titled "Burgernomics," the authors reported a correlation of 0.73 between the prices derived from the Big Mac Index and those calculated using the Penn World Tables. This suggests that, despite its simplicity, this single-good index captures a substantial portion of the economic effects measured by more professional (and complex) PPP methodologies.

The Economist utilizes the Big Mac Index to pinpoint currencies that are overvalued or undervalued, essentially identifying where a Big Mac is comparatively expensive or cheap when measured against current exchange rates. An article from January 2019 noted that a Big Mac cost HK $20.00 in Hong Kong and US$ 5.58 in the United States. The implied PPP exchange rate derived from this data is 3.58 HK $per US$ . The significant difference between this implied rate and the actual market exchange rate of 7.83 HK $per US$ suggests that the Hong Kong dollar was 54.2% undervalued at that time. In simpler terms, it was cheaper to convert US dollars into Hong Kong dollars and purchase a Big Mac in Hong Kong than to buy one directly with US dollars.

KFC Index

Main article: KFC Index

Similar in principle to the Big Mac Index, the KFC Index measures PPP using a basket consisting of a single item: a KFC Original 12/15 pc. bucket. The Big Mac Index is not applicable to most African countries due to the limited presence of McDonald's restaurants. Consequently, the KFC Index was developed by Sagaci Research, a market research firm specializing in Africa, to identify overvalued and undervalued currencies across the continent.

For example, the average price of KFC's Original 12 pc. Bucket in the United States in January 2016 was $20.50. In Namibia, however, the same bucket cost only$ 13.40 at market exchange rates. Based on this, the index indicated that the Namibian dollar was undervalued by 33% at that time.

iPad Index

Much like the Big Mac Index, the iPad index, further elaborated by CommSec, compares the price of a specific item across various locations. Unlike the Big Mac, however, iPads are manufactured in a single location (with the exception of the model sold in Brazil), and all iPads within the same model exhibit identical performance characteristics. Therefore, price variations primarily reflect differences in transportation costs, taxes, and the pricing strategies employed in individual markets. In 2013, an iPad was found to cost approximately twice as much in Argentina as it did in the United States.

Country or region	Price (US dollars)
Argentina	$1,094.11
Australia	$506.66
Austria	$674.96
Belgium	$618.34
Brazil	$791.40
Brunei	$525.52
Canada (Montréal)	$557.18
Canada (no tax)	$467.36
Chile	$602.13
China	$602.52
Czech Republic	$676.69
Denmark	$725.32
Finland	$695.25
France	$688.49
Germany	$618.34
Greece	$715.54
Hong Kong	$501.52
Hungary	$679.64
India	$512.61
Ireland	$630.73
Italy	$674.96
Japan	$501.56
Luxembourg	$641.50
Malaysia	$473.77
Mexico	$591.62
Netherlands	$683.08
New Zealand	$610.45
Norway	$655.92
Philippines	$556.42
Pakistan	$550.00
Poland	$704.51
Portugal	$688.49
Russia	$596.08
Singapore	$525.98
Slovakia	$674.96
Slovenia	$674.96
South Africa	$559.38
South Korea	$576.20
Spain	$674.96
Sweden	$706.87
Switzerland	$617.58
Taiwan	$538.34
Thailand	$530.72
Turkey	$656.96
UAE	$544.32
United Kingdom	$638.81
US (California)	$546.91
United States (no tax)	$499.00
Vietnam	$554.08