What is “PPP based”?
>>>What is PPP based?<<<
aka “Big Mac Index”
The Big Mac PPP exchange rate between two countries is obtained by dividing the price of a Big Mac in one country (in its currency) by the price of a Big Mac in another country (in its currency). This value is then compared with the actual exchange rate; if it is lower, then the first currency is under-valued (according to PPP theory) compared with the second, and conversely, if it is higher, then the first currency is over-valued.
For example, using figures in July 2008:
1.the price of a Big Mac was $3.57 in the United States (varies by store)
2.the price of a Big Mac was £2.29 in the United Kingdom (Britain) (varies by region)
3.the implied purchasing power parity was $1.56 to £1, that is $3.57/£2.29 = 1.56
4.this compares with an actual exchange rate of $2.00 to £1 at the time
5.(2.00-1.56)/1.56 = 28%
6.the pound was thus overvalued against the dollar by 28%
It means that PPP based GDP for UK = factual GDP minus 28% for this index.
GDP - Gross Domestic Product - the value of all goods and services produced within a country’s borders. Official government figures are mostly made up, particularly those of the underdeveloped countries.
PPP - Purchasing Power Parity. The 100% made up, politically correct version of GDP.
It means adjusting for local cost of goods and services. For a purely American example - someone living in New York earns 100k a year, and someone in Houston makes 75k a year. In theory, the New Yorker is richer, but due to the lower cost of living in Texas, the purchasing power of a dollar goes further.