Purchasing power parity (PPP) explained with real prices

Purchasing power parity (PPP) is the exchange rate at which the same basket of goods costs the same in two countries. You find it by dividing a local price by the US price. A Big Mac costs ¥500 in Japan and $6.22 in the United States, so the PPP rate is about ¥80.4 per dollar. The market rate is ¥159, which means the yen is roughly 49% undervalued on this one-item test. Across the 53 economies in the latest Big Mac survey, 42 currencies look undervalued against the dollar and 11 look overvalued.

The idea in one line

PPP starts from the law of one price: if the same thing sells for different amounts in two places, traders will buy where it is cheap and sell where it is dear until the gap closes. Apply that to whole currencies and you get a prediction about where exchange rates “should” sit. The formula is simple:

PPP rate = price in local currency ÷ price of the same item in US dollars.

Compare that implied rate with the rate banks actually quote. If the PPP rate is lower than the market rate, your dollars buy more locally than the theory says they should, and the local currency is called undervalued. If the PPP rate is higher, the currency is overvalued. That is all a “valuation” in this context means: a gap between two exchange rates, not a judgement about an economy.

Absolute PPP vs relative PPP

There are two versions of the theory, and they make very different claims.

• Absolute PPP says price levels should match: a basket should cost the same everywhere once converted. It almost never holds in the data. Today’s Big Mac runs from $2.38 to $9.04 at survey exchange rates.
• Relative PPP is the weaker and more useful version. It says changes in exchange rates should offset differences in inflation. If prices rise 20% faster in one country than in another, its currency should lose about 20% against the other over time.

We can test the relative version with two Big Mac surveys, January 2026 and July 2026. The US burger moved +2% in dollars over that period. Relative PPP predicts that a country whose local burger price rose faster should see its currency weaken by roughly the difference. Of the 53 countries in both surveys, 21 kept the local price unchanged. These are the six with the biggest local price moves:

A positive FX move means more local currency per dollar, i.e. the currency weakened. In 4 of these 6 cases the currency moved in the direction relative PPP predicts, and the closest fit was Egypt, where the prediction was +14% and the outcome +7%. Where the two numbers diverge, the burger got cheaper or dearer in dollar terms, which is exactly what shifts a country up or down the latest Big Mac Index. Six months is a short window; relative PPP is a long-run tendency, and it tends to show up most clearly where inflation is high.

The Big Mac as a PPP test

The Economist’s Big Mac Index turns PPP into something you can order at a counter. The burger is made to much the same recipe almost everywhere, and its price folds in local beef, bread, wages, rent and tax. Below, the implied PPP rate is the local Big Mac price divided by the US price; the market rate is today’s rate from our exchange-rate feed (retrieved 2026-10-13). We show our 12 core markets plus the most extreme readings at each end.

The most undervalued currency on this measure is Indonesia’s, at -61%: a Big Mac there implies 6,913 IDR per dollar against a market rate of 17,924. At the other end, Uruguay’s burger implies 57.7 UYU per dollar against a market 40.2, a valuation of +44%. Because our market rates are today’s and the burger prices are from the July 2026 survey, these figures can differ slightly from The Economist’s own, which use survey-day rates. The full country list, with what $100 buys in each, is in our purchasing power by country guide.

Why PPP breaks down for tradables like the iPhone

A Big Mac cannot be shipped from a cheap country to a dear one, so its price reflects local costs. An iPhone can, and Apple prices it with one eye on the global market. That is why phone prices sit much closer together than burger prices. Across our 12 Apple storefronts, the most expensive iPhone 18 Pro costs 1.43 times the cheapest in dollars. For the Big Mac in the same 12 markets the ratio is 3.02.

That gap is what makes PPP misleading for tradables. Convert the local iPhone price with the Big Mac PPP rate instead of the market rate and you see what the phone costs relative to local prices of everyday things. In India, the iPhone 18 Pro is ₹164,900, or $1,719 at the market rate, but $4,341 in Big Mac PPP terms. Put another way, it costs as many burgers as $4,341 would buy in America, where the phone lists for $1,199 before sales tax.

Economists call the underlying pattern the Balassa–Samuelson effect. Rich countries are very productive at making traded goods, which pushes up wages across the whole economy, including in haircuts, restaurant kitchens and burger counters where productivity is similar everywhere. So non-traded services are dear in rich countries and cheap in poor ones, while traded goods cost about the same. PPP built from local prices will always make imported tech look extraordinarily expensive in lower-income countries. Apple’s prices also include each country’s VAT or GST and import duty, except in the US, where list prices exclude sales tax. See the full breakdown on the iPhone 18 Pro price page.

PPP rates vs market exchange rates: which to use

Each answers a different question. Market rates tell you what your money converts to today, so they are right for travel budgets, online purchases and anything traded across borders. PPP rates tell you what money buys at home, so international bodies such as the World Bank and the IMF use them to compare living standards and the size of economies; a PPP-adjusted GDP figure is usually far higher than the market-rate figure for lower-income countries.

Neither is perfect for comparing what life costs to the people living it. That is why PricesAbroad measures prices against income instead: how many days of the average income a product takes. The method is explained in days of income, and the results are ranked on the affordability index. For a one-item PPP check you can run yourself, start with our live Big Mac Index.