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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.
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.
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.
