Based on information from Wikipedia, “Purchasing Power Parity” refers to comparing the prices of specific goods in different countries to determine the relative purchasing power of their currencies and the living standards of their people.
In simpler terms, PPP is the exchange rate between two countries’ currencies that allows you to buy the same quantity of goods and services in each country.
Purchasing power parity is an important consideration that many people overlook when choosing a job or moving to another country. It can be a useful measure when comparing job offers, such as deciding between a ₹30 lakh offer in India or ₹80 lakh offer in the United States.
Using purchasing power parity (PPP), an income of ₹23 lakhs in India would have a comparable value of ₹65 lakhs in the United Kingdom and ₹37 lakhs in the UAE.
It’s important to note that PPP conversion alone is not sufficient, as developed countries also provide benefits such as public infrastructure, technology, services, opportunities, and social security. However, it can still be a factor to consider alongside other considerations.
Purchasing Power Parity of India
India’s position in the global ranking of purchasing power parity (PPP) is subject to variation based on the data source and the specific year. The World Bank’s latest PPP data for 2020 places India as the fifth-ranked country worldwide in terms of PPP-adjusted GDP, trailing only the United States and China.
However, India’s per capita PPP-adjusted GDP is significantly lower, ranking 126th globally in 2020.
Factor contributes to India’s Purchasing Power Parity (PPP) are:
1. Average Incomes
As mentioned previously, one of the main factors influencing purchasing power parity (PPP) is the average income level of a country. India’s per capita income is relatively low compared to developed nations like the United States, which leads to a lower PPP.
2. Cost of Production
Due to the generally lower cost of producing goods and services in India compared to developed countries, it often results in lower prices and higher purchasing power parity (PPP). This means that the same amount of money can buy more goods and services in India compared to those developed nations.
3. Exchange Rates
Exchange rates play a significant role in PPP calculations, and fluctuations in the value of the Indian rupee against other currencies can indeed impact India’s PPP ranking. Changes in exchange rates can affect the relative prices of goods and services between countries, thereby influencing the purchasing power of different currencies. Therefore, variations in the value of the Indian rupee against other currencies can have an impact on India’s position in the global PPP ranking.
4. Inflation Rates
Inflation has an impact on the calculation of purchasing power parity (PPP) as it can cause changes in the cost of living across different countries. These changes in prices can affect the relative purchasing power of currencies and thereby influence the PPP calculations.
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Economic Policies and Regulations
Policies and regulations pertaining to taxation, trade, and investment can indeed influence the cost of goods and services in India, consequently affecting the country’s purchasing power parity (PPP). Such policies can have an impact on factors such as production costs, import/export duties, and foreign investment, all of which can influence the overall cost structure and prices of goods and services in the country.
When we compare purchasing concepts between INDIA v/s USA or other country, there are few important points that must be considered:
- In India, the cost of hiring a maid, cook, driver, and other amenities for a month is equivalent to the price of a single round of drinks in the US.
- Foreign countries may offer a desirable lifestyle, but it’s important to consider that they also have their share of issues. For instance, the United States faces challenges such as gun violence and racism.
- When considering purchasing power, it’s important to note that buying assets like houses, expensive cars, iPhones, Macbooks, and high-end clothing from brands like Zara can vary significantly in different countries. The cost and affordability of these items may differ greatly based on the purchasing power of the local currency.
- Obtaining citizenship abroad can be a challenging process. In some cases, the wait for a Green Card in the United States as an Indian citizen can be lengthy, to the extent that it may take many years or even until old age before approval is granted.
- If your goal is to earn money abroad and save for returning back to your home country, having a significant amount of savings can be beneficial. However, if your intention is to settle abroad, the concept of purchasing power parity becomes relevant once again.
- With a similar rate of savings from your earnings in India, you can maintain a comparable lifestyle in terms of affordability and standard of living in the foreign country.
- It’s important to consider that other countries may have similar or higher tax rates compared to your home country.
- When living abroad, you will be subject to paying taxes to the foreign nation where you reside. Tax obligations vary between countries, and it’s crucial to understand and comply with the tax laws and regulations of the specific country you are living in.
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Purchasing power parity (PPP) is a measurement used to compare the relative purchasing power and living standards of different countries. India’s position in the global PPP ranking can vary depending on factors such as average income levels, production costs, inflation, exchange rates, and government policies related to taxation, trade, and investment. While India ranks high in terms of PPP-adjusted GDP, the per capita PPP-adjusted GDP is relatively low. Understanding the dynamics of PPP is crucial when considering factors like cost of living, savings, and lifestyle comparisons between countries.
-By, Trading Fuel