# I want to simulate Purchase Power Parity in my own universe, how can I do that?

I am currently working on a modern fantasy world, in which I am working on gdp and statistics for, I'm having a issue simulating PPP for each of the nations, and I can't find any good articles on it. I hope I can find some aid here.

I'm mostly having a difficulty with how to get the data to calculate it, and not so much the PPP itself.

• Welcome to worldbuilding. Please take a moment to visit help center and take the tour. We're pretty strict about what is and isn't a good fit for this site. For instance questions that that have many valid answers aren't considered a good fit for this site. It seems like any article about PPP will be a valid answer to this post. What are the issues you're having with simulating PPP? Do you think you could ask a more specific question about that? Nov 1, 2021 at 21:12
• I'm having difficulties with the concept in general, and specially applying it to my setting. The formula is simple but getting the data to fill it isn't. So yea. Nov 1, 2021 at 21:38
• If you're having difficulties with getting data to apply to your PPP calculations then asking for good articles on PPP probably won't solve your problem. You'd likely get answers referencing articles explaining PPP, what it's used for and how it's calculated. You could try to edit your post so so that it will be a better fit for this site. If you don't it's likely to be closed until edits are made. Nov 1, 2021 at 21:42
• There. I've done it. Nov 1, 2021 at 21:56
• Can you edit your question so you're explicitly asking for what you're looking for. Nov 1, 2021 at 22:20

Just a quick and dirty explanation.

Purchasing-power parity is essentially a correction coefficient applied to the actual money-market exchange rate of a currency in order to account for the simple fact of life that goods and services have different relative prices in different places.

To give a practical example:

• Let's suppose that in the U.S.A. a typical price for a reasonably good Internet service substription is 100 USD. (It not important if it isn't 100 USD; could be 50, could be 150. Just adjust the example accordingly.)

• In Romania, a typical price for a good Internet service subscription is about 50 RON.

• The money-market exchange rate between the Romanian New Leu and the United States Dollar is 1 USD = 5 RON.

• But for the purpose of buying an Internet service subscription, 100 USD buy the same thing as 50 RON, so that for the purpose of buying Internet access, the purchasing-power parity is 1 USD = 0.5 RON. That is, for the purpose of buying Internet access, the USD to RON exchange rate is ten times lower than the money-market rate.

In practice, you wouldn't look at just one price. You would set up what's called a basket of goods and services, which ought to be representative for what people actually buy in their day to day life. Bread, potatoes, gasoline, diesel fuel, electricity, housing, clothes, mobile phones, etc., etc., and Internet access.

You then assign weights to each of the goods and services in the selected basket, and take a weighted average of the ratios between the prices in one country and the prices in the other. (The weights are supposed to represent the relative importance of each good or service in a typical budget. They should add up to 1.)

This will give you a notional purchasing-power parity rate of one currency compared to the other.

It's not an exact result, because it depends on the chosen basket and the chosen weights; but, if done carefully, it allows you to get a feeling of how well off or how bad an average person would be in one country compared to the other, which just comparing incomes at the market rates will not.

Please note that people living in different places consume different goods and services, and consume them in different proportions, so that there is a natural limit to the possible accuracy of the calculation of a purchasing power parity. For example, most Europeans do not care about the price of whisky, whereas most Americans do not care about the price of wine.

So, practical recipe to invent your data:

• Establish a basket of goods and services. Do not include only expensive goods, include also cheap goods, if they add up to a significant part of the budget. Assign weights to the goods and services, representing their part in a month's or a year's budget.

• For each of the goods and services, set a price in local currency in each country.

• Note that for goods which are easily bought online, the prices should more or less match the money-market exchange rates, because otherwise enterprising souls will smell an opportunity for arbitrage and act on it, bringing the prices in line with the currency exchange rates.

• But for goods and services which cannot really be bought online from abroad, local prices are very often very very different from what the money-market exchange rate would suggest. Bread, water, cola, haircuts, everyday clothes, shoes, dentists, fruit, meat, cooking oil, bus/tram/subway tickets, cookies, cakes, chocolate, beer, fast-food sandwiches, beans, ice cream, Internet access, mobile phone plans, taxis, car repair and maintenance, books, wine, toilet paper, kitchen towels, fresh orange juice, football match tickets, movie tickets, dinner in a decent restaurant, ...

• Now you have a nice matrix of prices which allows to you assign PPP rates between the currencies of your countries.

• Thanks a lot! You're amazing! Nov 1, 2021 at 23:36
• Not that we don't love Alex beyond reason (he's one of the most knowledgeable users on the Stack), but just to note that we recommend waiting 24 hours before giving out the coveted green check mark. We have users all around the world and human nature is to not give as much attention to Qs with accepted As as to those without. While it's improbable that a better answer would come along, some valuable info could have but might be lost simply because that check appeared too early.
– JBH
Nov 1, 2021 at 23:47
• I'd note there's the very (not-so-)serious Big Mac Index from The Economist, which does that using fast food. It's not a perfect index but it's an easy one to grasp. Nov 2, 2021 at 8:51
• You should at least mention the main issue with these PPP computations, which lies in the composition of the basket of goods. People in different places buy very different things, and no, just averaging doesn't help here. Buying a typical US basket is cheaper in the US than in France, at the same time, buying a French basket is cheaper in France than the US. Nov 2, 2021 at 14:27
• @quarague: It is already in the answer: *"it depends on the chosen basket and the chosen weights". And moreover, it explicitly says that it will only give a "feeling" of the relative finnacial well-being. Yes, you are right that people living in different places consume different things; adding that to the answer. Nov 2, 2021 at 14:34

Does your world have any connection with the U.S. (or other advanced nations)? If so, then see AlexP's response.

If not, then just look at what you're producing, assign U.S. prices to everything, and calculate GDP (and especially GDP per capita, which shows your standard of living). That will be your PPP GDP (per capita). So if you are a poor country producing beets and sackcloth, then your GDP per capita will be low; if you are an advanced country producing semiconductors and chemotherapy, then your GDP per capita will be high.