PPP Formula: How to Calculate Purchasing Power Parity
TL;DR: The Purchasing Power Parity formula isS = P1 ÷ P2, where S is the PPP exchange rate between two currencies, P1 is the price of a basket of goods in the first currency, and P2 is the price of that same basket in the second. To apply it to a salary, divide your salary by your own country's PPP conversion factor and multiply by the destination country's. Both versions are worked through below.
The purchasing power parity formula
S = P1 ÷ P2
This is the standard economics definition. S is the PPP exchange rate between two currencies. P1 is the cost of a basket of goods in the first currency, and P2 is the cost of that same basket in the second. Two currencies are at purchasing power parity when the basket costs the same in both, once converted.
A simple illustration, using round hypothetical numbers rather than current prices: if an identical basket costs 5.00 US dollars in the United States and 4.00 pounds in the United Kingdom, then S = 5.00 ÷ 4.00 = 1.25. The PPP exchange rate is 1.25 US dollars per pound. If the market exchange rate that day is 1.30, the pound is overvalued against the dollar by that measure. This single-item version of the calculation is the idea behind The Economist's Big Mac Index.
In practice nobody prices a single basket by hand. The World Bank's International Comparison Program surveys hundreds of comparable items across participating countries and publishes the result as a PPP conversion factor per currency, which is the number this site uses. See our methodology for how that data is collected and refreshed.
Absolute PPP and relative PPP
Textbooks split the concept in two, and the distinction decides which formula you want.
Absolute PPP is the version above, S = P1 ÷ P2. It compares price levels at one moment and asks what the exchange rate should be right now.
Relative PPP compares rates of change instead. It says the percentage change in the exchange rate between two countries should equal the difference in their inflation rates, so a country with persistently higher inflation should see its currency depreciate by roughly that gap. Written out, the expected change in S equals the inflation rate in country 1 minus the inflation rate in country 2.
Absolute PPP is the one you want for comparing a salary or a cost of living today. Relative PPP is used for forecasting where an exchange rate should drift over time. For why the PPP rate and the market exchange rate disagree in the first place, see PPP vs exchange rate.
Applying the formula to a salary
Equivalent salary = (Your salary ÷ PPP factor of your country) × PPP factor of the destination country
The "PPP factor" is the World Bank's PPP conversion factor: how many units of a country's currency are needed to buy the same basket of everyday goods and services that one international dollar buys in the United States. Dividing your salary by your own country's factor converts it into that common baseline; multiplying by the destination country's factor converts it back out into local terms there.
Step-by-step: how to calculate it yourself
- Look up your country's PPP factor and the destination country's PPP factor (see our full country ranking).
- Divide your salary by your own country's factor.
- Multiply the result by the destination country's factor.
- The number you get is the salary you'd need in the destination country to match your current purchasing power.
For example, Canada's current PPP factor is 1.26 CAD and Australia's is 1.465 AUD (2025/2025 World Bank data).
Worked examples
Canada → Australia: 60,000 CAD is roughly equivalent to 69,716 AUD.
India → Singapore: 60,000 INR is roughly equivalent to 3,096 SGD.
Canada → Philippines: 60,000 CAD is roughly equivalent to 977,413 PHP.
See the full working for these pairs on their dedicated comparison pages: Canada vs Australia, India vs Singapore, Canada vs Philippines.
Common mistakes when calculating PPP by hand
- Applying the formula backwards: dividing by the destination country's factor instead of multiplying by it.
- Confusing the PPP factor with the market exchange rate. They measure different things and are usually different numbers.
- Using an outdated factor. Each country's figure is only updated when the World Bank publishes a new report, so check the year attached to the data.
Frequently asked questions
What is the PPP formula in simple terms?
Take your salary, divide it by your own country's PPP factor to get a common baseline, then multiply by the destination country's PPP factor. The result is what you'd need to earn there to match your current purchasing power.
What is the difference between absolute and relative purchasing power parity?
Absolute purchasing power parity compares price levels at a single point in time, using the formula S = P1 divided by P2, and asks what the exchange rate between two currencies should be right now. Relative purchasing power parity compares rates of change instead: it holds that the percentage change in an exchange rate should equal the difference between the two countries inflation rates. Use absolute PPP to compare a salary or cost of living today, and relative PPP to forecast how an exchange rate should move over time.
How do you calculate the PPP exchange rate?
Divide the price of an identical basket of goods in the first currency by the price of that same basket in the second currency. If a basket costs 5.00 US dollars and 4.00 pounds, the PPP exchange rate is 1.25 US dollars per pound. Comparing that figure with the market exchange rate shows whether a currency is overvalued or undervalued in purchasing power terms. The World Bank publishes this calculation for 184 countries as its PPP conversion factor, derived from International Comparison Program price surveys rather than a single basket.
Do I need the exchange rate to calculate PPP?
No. The whole point of PPP is that it replaces the market exchange rate with each country's PPP conversion factor, which reflects relative price levels rather than currency trading value.