India's income per person nearly quadruples once you compare local prices
Convert India's output per person into US dollars at market exchange rates and you get about 1,965. Measure it instead by what that money actually buys at home, and the figure jumps to around 7,197 international dollars. That gap is what purchasing power parity captures, and it reshapes how rich or poor countries appear.
The idea rests on the law of one price: without shipping costs or trade barriers, an identical item should cost the same everywhere. If a computer is 500 US dollars in New York and 2000 Hong Kong dollars in Hong Kong, the implied exchange rate is four to one. Because tariffs, transport and poverty distort single goods, statisticians price a whole basket instead. The OECD's list covers around 3,000 consumer goods and services, plus 30 government occupations, 200 kinds of equipment and roughly 15 construction projects.
Market exchange rates swing with trade flows, speculation, interest rates and central bank interventions. If the Mexican peso halved against the dollar, Mexico's GDP in dollars would halve too, yet Mexicans paying the same peso prices for local goods would hardly be twice as poor. Rates adjusted for purchasing power are steadier, which is why they are used to compare national incomes, and they are especially handy where governments hold official exchange rates artificially high. In 2011 the Big Mac Index, pricing one burger around the world, helped expose Argentina's manipulated inflation figures.
The correction runs both ways. Denmark's nominal output per person, about 53,242 dollars, falls to around 46,602 international dollars once its high local prices are counted. A common yardstick is the Geary–Khamis or international dollar; in 2003 the World Bank reckoned one was worth about 1.8 Chinese yuan in local purchasing power, far from the official rate.
The method has real weaknesses. Different organisations choose different baskets and get different answers. Quality varies between countries, and eating habits differ, since Americans eat more bread and Chinese more rice, so a basket based on one nation's diet gives different results from one based on another's. Comparing more than two countries at once adds further statistical complications.
Source: Purchasing power parity
