Purchasing power parity (PPP) is an economic theory and metric that compares the relative value of different countries' currencies by measuring how much of each currency is needed to purchase the same basket of goods and services in each country.

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The core idea is that, in the absence of transportation costs and trade barriers, identical goods should cost the same when priced in a common currency. This allows economists to compare economic productivity, living standards, and the real value of currencies across countries.

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PPP is calculated by determining the exchange rate at which one nation's currency would need to be converted into another so that the same basket of goods could be bought in both countries.

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Example:
If a burger costs $5 in the U.S. and the same burger costs £4 in the UK, then according to PPP, the exchange rate should be:

$5 = £4 → 1 USD = 0.80 GBP

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