Bangkok, Thailand

PPP: What does Purchasing Power Parity even measure?

May 1, 2026

Introduction

In Thailand, the average person lives on roughly $7,000 a year. In the United States, that number is more than tenfold. So how can the average Thai person survive on just 1/10 of what a typical American consumes in a year?

Chances are they don't. While it's true that, in developing countries, the average person consumes far less than, Real GDP per capita fails to account for differences in cost of living. Wealthier countries, of course, cost more to live in than developing countries. To account for that, Economists often make a third adjustment to GDP, being for Purchasing Power Parity, or PPP.

When adjusted for PPP, the Thai GDP per capita triples. That result is still unequal, but to a much lesser extent.

How is PPP calculated?

As an adjustment for differences in cost of living, PPP works by comparing the price of a product in one country with that of another. If you've ever heard of the Big Mac index, it's one way of measuring PPP.

Of course, no single product can be used to accurately model something as complex as an entire economy. Instead, Economists create a basket of different goods and services to represent that whole cost of living.

By doing that, no single good holds too much influence over PPP.

What about exchange rate?

It's important to remember that exchange rate isn't another measure of differences in cost of living. That said, it's still crucial for calculating PPP. In Thailand, for instance, 1 US dollar equals about 32 Baht in local currency. If the PPP between Thailand and the US were calculated without first converting to a common currency, the result would be off by a factor of 32.

When do Economists use PPP?

It should go without saying that PPP adjustments are typically made when differences in cost of living matter. In development economics, for instance, this is a crucial step for evaluating wellbeing at the individual level. Of course, if differences in cost of living don't matter, as with international trade, PPP adjustments should not be made. Yet again, it really depends on what we want to compare.

Sources

World Bank, "GDP per capita (current US$)." Accessed on 5/1/2026. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD.
Eurostat, OECD, IMF, and World Bank (2026) – with minor processing by Our World in Data. “GDP per capita – World Bank – In constant international-$” [dataset]. Eurostat, OECD, IMF, and World Bank, “World Development Indicators 125” [original data]. Retrieved May 1, 2026 from https://archive.ourworldindata.org/20260417-112857/grapher/gdp-per-capita-worldbank.html (archived on April 17, 2026).

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