Determine the theoretical exchange rate between two currencies based on the price of goods.
Currency A (Counter Currency)
The cost of the specific item in the local currency (e.g., Pesos, Yen, GBP).
Currency B (Base Currency)
The cost of the SAME item in the foreign currency (e.g., USD, EUR).
Market Comparison (Optional)
Enter rate as: How much Currency A for 1 Unit of Currency B?
Implied PPP Exchange Rate:–
Actual Market Rate:–
function calculatePPP() {
// 1. Get input values
var costA = parseFloat(document.getElementById('costCurrencyA').value);
var costB = parseFloat(document.getElementById('costCurrencyB').value);
var marketRate = parseFloat(document.getElementById('marketExchangeRate').value);
var symbolA = document.getElementById('symbolA').value.trim() || "Currency A";
var symbolB = document.getElementById('symbolB').value.trim() || "Currency B";
// 2. Validation
if (isNaN(costA) || isNaN(costB) || costB === 0) {
alert("Please enter valid prices for the good in both currencies. Cost in Currency B cannot be zero.");
return;
}
// 3. Calculate PPP
// Formula: S = P1 / P2
var pppRate = costA / costB;
// 4. Display Results
var resultDiv = document.getElementById('resultsArea');
var pppDisplay = document.getElementById('pppResult');
var marketDisplay = document.getElementById('marketRateDisplay');
var marketRow = document.getElementById('marketRateRow');
var valuationBox = document.getElementById('valuationBox');
resultDiv.style.display = "block";
// Format PPP Result
pppDisplay.innerHTML = pppRate.toFixed(4) + " " + symbolA + " / " + symbolB;
// 5. Calculate Valuation if Market Rate is provided
if (!isNaN(marketRate) && marketRate > 0) {
marketRow.style.display = "flex";
marketDisplay.innerHTML = marketRate.toFixed(4) + " " + symbolA + " / " + symbolB;
// Percentage Difference = ((Market – PPP) / PPP) * 100
// Interpretation:
// If PPP is 100 JPY/USD and Market is 110 JPY/USD.
// Dollar buys MORE Yen on market than goods suggest. Dollar is OVERVALUED.
// Yen is UNDERVALUED.
var difference = ((marketRate – pppRate) / pppRate) * 100;
var absDiff = Math.abs(difference).toFixed(2);
var status = "";
var explanation = "";
if (difference > 0) {
// Market Rate > PPP Rate
// Currency B (Denominator) is Overvalued
status = symbolB + " is Overvalued by " + absDiff + "%";
explanation = "The market exchange rate suggests " + symbolB + " is stronger than its purchasing power implies.";
} else if (difference < 0) {
// Market Rate < PPP Rate
// Currency B is Undervalued
status = symbolB + " is Undervalued by " + absDiff + "%";
explanation = "The market exchange rate suggests " + symbolB + " is weaker than its purchasing power implies.";
} else {
status = "Fairly Valued";
explanation = "The market rate matches the purchasing power parity exactly.";
}
valuationBox.innerHTML = "
How to Calculate Purchasing Power Parity (PPP) Exchange Rates
Purchasing Power Parity (PPP) is a vital economic theory used to determine the relative value of currencies. Unlike standard market exchange rates, which fluctuate based on speculation, interest rates, and geopolitical events, PPP focuses on the tangible buying power of money. This tool helps economists, investors, and travelers understand if a currency is overvalued or undervalued by comparing the cost of identical goods in different countries.
The Purchasing Power Parity Formula
The calculation relies on the "Law of One Price," which states that in an efficient market without transportation costs or trade barriers, identical goods should cost the same regardless of where they are sold. The formula for the implied exchange rate is:
S = P1 / P2
Where:
S = The implied PPP Exchange Rate (Currency 1 per unit of Currency 2).
P1 = The price of a good (or basket of goods) in the domestic currency (Currency 1).
P2 = The price of the same good in the foreign currency (Currency 2).
Real-World Example: The Big Mac Index
The most famous example of PPP in action is "The Big Mac Index," popularized by The Economist. It simplifies the basket of goods down to a single item sold globally: a McDonald's Big Mac.
Example Calculation:
Let's assume we want to calculate the PPP rate between the US Dollar (USD) and the British Pound (GBP).
Price in USA (Currency B): $5.50 USD
Price in UK (Currency A): £4.09 GBP
To find the implied exchange rate (GBP per USD), we divide the UK price by the US price:
4.09 / 5.50 = 0.7436
This means, according to PPP, 1 USD should equal 0.7436 GBP. If the actual market exchange rate is 0.80 GBP per USD, the Dollar is buying more Pounds than it "should" based on burger prices. Therefore, the USD would be considered overvalued compared to the GBP.
Why Use a PPP Calculator?
Calculating PPP offers several advantages over simply looking at forex market rates:
Standard of Living Comparisons: It allows for a more accurate comparison of GDP and income levels across countries by adjusting for cost of living differences.
Long-term Trends: While market rates are volatile, exchange rates tend to move toward the PPP rate over the long term.
Investment Valuation: Traders use PPP to identify currencies that are significantly undervalued, anticipating a correction in the future.
How to Use This Tool
To use the calculator above effectively:
Identify a specific item (e.g., a loaf of bread, a liter of gasoline, or a specific smartphone) available in both countries.
Enter the price of that item in Currency A (the counter currency, usually the local currency).
Enter the price of the same item in Currency B (the base currency, usually the currency you are comparing against, like USD).
(Optional) Enter the current market exchange rate to see if the currency is overvalued or undervalued. Ensure the market rate format matches your inputs (Currency A per 1 unit of Currency B).