Purchasing power parity (PPP) is a measure of the price of specific goods in different countries and is used to compare the absolute purchasing power of the countries currencies. It is based on the law of one price, which states that if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location. PPP is an economic term for measuring prices at different locations and is used to compare economies regarding their gross domestic product (GDP), labor productivity, and actual individual consumption.

PPP is calculated by comparing the prices of a basket of goods and services in different countries. For example, if a basket consisting of 1 computer, 1 ton of rice, and half a ton of steel was 1000 US dollars in New York and the same goods cost 6000 HK dollars in Hong Kong, the PPP exchange rate would be 6 HK dollars for every 1 US dollar.

PPP is important because it provides a way to compare levels of growth and standards of living in various nations, each of which has its own currency. PPP allows economists to compare economic productivity and standards of living between countries. Some countries adjust their gross domestic product (GDP) figures to reflect PPP. However, some feel that PPP does not reflect reality due to differences in local costs, taxes, tariffs, and competition.

PPPs are the rates of currency conversion that try to equalize the purchasing power of different currencies by eliminating the differences in price levels between countries. The basket of goods and services priced is a sample of all those that are part of final expenditures: final consumption of households and government, fixed capital formation, and net exports. PPP is generally regarded as a better measure of overall well-being than market exchange rates.