Purchasing power parity (PPP) is an economic theory that compares the relative value of currencies and the cost of living between countries by taking into account the price levels of a consistent basket of goods and services. PPP data helps to assess how much money is needed in one country compared to another to maintain the same standard of living.
By adjusting exchange rates according to the cost of living, PPP allows for a more accurate comparison of economic productivity and standards of living than nominal exchange rates alone. For instance, if a basket of goods costs $100 in the U.S. and an equivalent basket costs 200 local currency units in another country, the PPP exchange rate would be calculated to determine how the currencies compare in terms of purchasing power, highlighting potential disparities in living costs.