When comparing the economies of two countries, people often look at currency exchange rates. For instance, as of today, 1 USD equals 87 INR. This means you can exchange 1 US Dollar for 87 Indian Rupees.
However, in reality, we don’t trade currencies—we trade goods and services. Instead of relying solely on exchange rates, a more practical way to compare economies is through Purchasing Power Parity (PPP).
PPP measures how much a unit of currency can buy in different countries. It compares the prices of the same goods and services across nations, offering a clearer picture of economic differences.
Purchasing Power = Amount of goods & services that a unit of currency can buy
Today I am going to compare the purchasing power of INR and USD for groceries.
Grocery Prices – India vs US
- Date: Feb 04, 2025
- Exchange rate: $1 = ₹87
- Location: Maharashtra, India vs California, US
| Grocery Item | Cost in India | Cost in US | PPP |
|---|---|---|---|
| Onion | ₹45/kg | $1.18/lb (₹214/kg) | 4.7x |
| Tomato | ₹30/kg | $1.28/lb (₹245/kg) | 8.1x |
| Potato | ₹35/kg | $0.88/lb (₹170/kg) | 4.8x |
| Chicken (Boneless Breast) | ₹460/kg | $5.72/lb (₹1,098/kg) | 2.3x |
| Eggs (Brown, Cage Free) | ₹220/dozen | $10.65/dozen (₹928/dozen) | 4.2x |
| Milk | ₹56/litre | $3.72/128 fl oz (₹85/litre) | 1.5x |
Looking at the table above, you’ll notice that most grocery items are 3–4 times more expensive in the US than in India. So how to use this data?
The most common use of PPP is to compare the cost of living in two countries.
For example, in absolute monetary terms, you’ll find that the income levels are significantly higher in the US as compared to that of India. Suppose:
- Person A earns ₹15 lakh per year in India.
- Person B earns $70,000 per year in the US.
If we convert Person B’s income using the exchange rate, it seems like they’re earning around ₹60 lakh per year, four times more than Person A. But this comparison is misleading. To make a fair comparison, we must consider PPP. Since the cost of goods and services in the US is also much higher, Person A and Person B may have similar purchasing power despite the difference in income.
On the other side, this difference plays a huge role if you earn in the US and invest in India. This way you can leverage this difference to build assets in India at a much lower cost. This can put you at a significant advantage compared to someone earning solely in India.
At the end of the day, whether you’re earning rupees or dollars, what really matters is how much food and other resources you can buy with it!