What is purchasing power parity, and why does it matter when I move?

The World Bank describes PPPs as currency conversion factors that also act as price indexes. They convert money into a common currency while equalizing what it can buy.

Market exchange rates are different. The World Bank notes they are set by demand for a currency, including trade and capital flows. That is why PPPs should not be read as the right exchange rate.

The gap comes mostly from local services. The IMF explains that haircuts and other local services tend to be cheaper in lower-income countries. For many emerging and developing economies, the IMF says market and PPP rates differ by a factor of 2 to 4.

Here is a simple example. Say $1 buys 4,000 pesos at the bank. If a basket costing $100 at home costs 200,000 pesos locally, that basket costs you $50. Your money buys twice as much there.

PPP is an average, not your budget. Imported goods, cars and electronics may cost the same or more abroad. And if the local currency rises against your income currency, your advantage shrinks.