Inputs
Results
| t | St forecast | Market rate | Parity rate | Gap vs market (%) |
|---|
Example data table
These rows demonstrate inputs and outputs for various scenarios.
| Scenario | Domestic price | Foreign price | Parity S = PD/PF | Market rate | Misalignment % | πD% | πF% | n | Forecast Sn |
|---|---|---|---|---|---|---|---|---|---|
| Base example | 2,800 | 10 | 280.0000 | 277.5 | 0.90% | 12 | 3 | 5 | 327.9538 |
| Higher inflation | 2,800 | 10 | 280.0000 | 277.5 | 0.90% | 18 | 4 | 5 | 355.3922 |
| Lower inflation | 2,800 | 10 | 280.0000 | 277.5 | 0.90% | 8 | 3 | 5 | 304.2373 |
PPP price‑level ratio examples (illustrative)
Hypothetical price levels and parity rates for familiar pairs. Values are for demonstration only; replace with your own datasets when needed.
| Pair | Domestic price PD | Foreign price PF | Parity S = PD/PF | Market rate | Misalignment % |
|---|---|---|---|---|---|
| PKR/USD | 2,800 | 10 | 280.0000 | 277.50 | 0.90% |
| INR/USD | 600 | 10 | 60.0000 | 83.00 | -27.71% |
| EUR/USD | 9.5 | 10 | 0.9500 | 1.08 | -12.04% |
| GBP/USD | 12.0 | 10 | 1.2000 | 1.27 | -5.51% |
| JPY/USD | 1,300 | 10 | 130.0000 | 150.00 | -13.33% |
| MXN/USD | 170 | 10 | 17.0000 | 18.20 | -6.59% |
Relative PPP forecast scenarios (illustrative)
Using Sn = S0 × ((1+πD)/(1+πF))n. Scenarios show the sensitivity of the terminal rate to inflation differentials and horizon.
| Scenario | S0 | πD% | πF% | n (periods) | Sn |
|---|---|---|---|---|---|
| Base | 277.50 | 12 | 3 | 5 | 327.9538 |
| Faster domestic inflation | 277.50 | 18 | 4 | 5 | 355.3922 |
| Faster foreign inflation | 277.50 | 6 | 10 | 5 | 228.2363 |
| Equal inflation | 277.50 | 8 | 8 | 5 | 277.5000 |
| Longer horizon | 277.50 | 12 | 3 | 10 | 387.7355 |
Valuation bands vs market under PPP (illustrative)
Using the parity rate as an anchor, bands help visualize under or overvaluation. Here bands are centered on S = 280 for PKR/USD as an example.
| Band | Rate | Interpretation |
|---|---|---|
| -20% | 224.0000 | Substantial undervaluation versus parity anchor |
| -10% | 252.0000 | Moderate undervaluation relative to parity |
| Parity | 280.0000 | Aligned with basket-based parity |
| +10% | 308.0000 | Moderate overvaluation relative to parity |
| +20% | 336.0000 | Substantial overvaluation versus parity anchor |
Formula used
-
Absolute PPP:
Sparity = PD / PF, where S is domestic per foreign currency, and P are comparable price levels or basket costs.
-
Misalignment (%):
Δ% = ((Sparity − Sactual) / Sactual) × 100%.
-
Relative PPP:
Sn = S0 × \u2009((1+πD)/(1+πF))n, with π as per‑period inflation rates and n periods.
How to use this calculator
Enter currency codes, then provide domestic and foreign price levels to compute the absolute purchasing power parity rate. You may use CPI indices or matched basket prices, but keep the index bases consistent across countries. Add the current market rate to assess undervaluation or overvaluation.
For relative parity, set a base exchange rate and per‑period inflation rates for both economies. Choose the number of periods. Click Calculate to generate a forecast path, a comparative chart, and a period‑by‑period table. Use the export buttons to download CSV or a compact PDF.
This tool is for education and quick analysis. Real‑world pricing frictions, non‑traded goods, taxes, controls, and productivity gaps can drive persistent deviations from parity.
Why is it important to calculate purchasing power parity in the global market?
Purchasing power parity helps compare economic quantities across countries on a like‑for‑like basis. By adjusting for price‑level differences, analysts can evaluate real incomes, wages, and output without distortions from nominal exchange rates or local inflation. This supports clearer benchmarking of living standards, productivity, poverty metrics, and the real size of markets.
- Currency valuation check: PPP indicates whether a currency looks overvalued or undervalued versus long‑run fundamentals. Firms and investors use this as a reality check alongside market‑based models.
- Pricing and market entry: Multinationals size demand, set price corridors, and localize offers based on expected purchasing power, aiding product launches and country expansion choices.
- Budgeting and forecasting: Finance teams project exchange rates from inflation differentials to stress‑test margins, transfer pricing, and cross‑border budgets under plausible scenarios.
- Compensation and contracts: International HR and procurement reference PPP to design cost‑of‑living adjustments, expatriate packages, and long‑term supply agreements more fairly.
- Policy and development: Institutions compare GDP per capita and poverty lines using PPP to track welfare, convergence, and aid effectiveness across economies.
PPP is a long‑horizon anchor, not a short‑term trading signal. Non‑tradables, taxes, trade barriers, productivity gaps, and capital flows can sustain deviations. Combine PPP with balance‑of‑payments data, real effective exchange rates, and inflation‑indexed scenarios for robust decisions.