- Date : 15/09/2023
- Read: 3 mins
Purchasing power parity is a theory used to adjust the exchange rates of two currencies and determine their purchasing power compared to others.
There is massive hype about salary packages of over 1 crore. However, the rosy pictures drawn on the placement reports do not show the reality of packages offered by international companies. If you get an offer of INR 1 crore from a US company, you can get the same lifestyle in India for only INR 23 lakh. All this is because of purchasing power parity, which is used for adjusting the countries' currency exchange rates and determining a nation's purchasing power.
PPP is used worldwide to compare the income levels of different countries.
PPP works based on the exchange rate. The current exchange rate is 1 USD = 83.13 INR.
It gets affected by factors like housing, transportation, opportunities, and healthcare facilities of countries.
What is purchasing power parity?
PPP or Purchasing Power Parity is a concept used to calculate and compare the economic outputs of different countries. It compares the value of the same product or goods in two different countries in the currency of any one country.
How does purchasing power parity calculation work?
The PPP calculation is based on a mix of selected goods & services. Mainly, such goods from one country are compared with another to define their relationship in the PPP index. For example, goods costing $80 in the US may cost INR 800 in India. This means INR 800 in India can buy the same goods for US $ 80 (Rs. 6600) in the US. This indicates the higher purchasing power parity in India. Hence, the PPP exchange rate will be Rs. 10 for every 1 USD.
How does the cost-of-living impact salary?
PPP compares the standard of living and economic productivity between companies. Hence, you need to plan your money and personal finance properly. Analysing housing facilities, food, transportation, and healthcare facilities is essential before comparing salaries between countries. The cost of living causes a huge impact due to the purchasing power parity calculation in India.
Earning Rs. 23 Lakhs in India will match the power of Rs. 80 Lakhs in the US
Similarly, Rs. 23 Lakhs in India has the power of Rs. 65 Lakhs in the UK.
This is because of the difference in certain critical factors like education, public infrastructure, opportunities, and personal security. Therefore, analysing these factors is essential before getting excited about the rosy picture of a higher salary package.
Find the latest article on financial planning here.