What does the abbreviation PPP stand for when comparing the relative value of currencies?

PPP stands for Purchasing Power Parity, an economic concept used to compare the relative value of currencies through their buying power.

The idea is that identical goods should cost the same in different places after prices are converted into a common currency, assuming no transport costs, taxes, trade barriers, or other frictions. In practice, economists compare broad baskets of goods and services rather than a single product. If a basket costs 100 dollars in one country and 400 units of another currency in a second country, the implied PPP exchange rate is 4 units per dollar.

PPP exchange rates are useful for comparing living standards, national output, and incomes across countries because market exchange rates can be distorted by financial flows and can fluctuate sharply. The World Bank and International Comparison Program use large international price comparisons for such work.

PPP is not the same as the market exchange rate, and the two may differ for years. Non-traded services, wages, taxes, transport costs, product quality, and tariffs all weaken the simple law-of-one-price prediction. Relative PPP instead focuses on inflation differences and exchange-rate changes over time.