Asimpler way to calculate purchasing power parity between two countries is to compare the price of a good that is in fact identical across countries.

Standard Good.

Explanation:

Purchasing power parity theory states that the exchange rate between the currencies are in equilibrium when the purchasing capacity is identical in both the nations. The purchasing power is equal in both the countries only if the price level of certain fixed basket of goods in one nation is identical to the other nation.

If the price level in any of the one nation increases, as a result its currency depreciates against the currency of other nation.

Purchasing power parity is calculated by comparing the price of standard good that is similar across nations but one key problem is that different people of different countries consumes different set of goods and services. So, it is difficult to compare purchasing power of different countries.

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