If you have ever landed in another country and found lunch costs a third of what you pay at home, you have already met purchasing power parity. The currency conversion said one thing; the till said another.
Purchasing power parity — PPP — compares currencies by what they can actually buy. Instead of asking what a pound trades for on the market, it asks how much of a typical basket of goods and services a pound buys here, and how much the local currency buys there.
Why the two numbers drift apart
Exchange rates are set by financial markets: trade flows, interest rates, government policy and a great deal of speculation. The price of bread, rent or a bus fare barely enters into it. Local prices, meanwhile, are shaped by wages, land, taxes, transport and how much competition there is on the high street.
Those two forces have no obligation to agree. In many countries goods are far cheaper than the market rate implies, so converting a salary at the nominal rate makes it look smaller than it feels to the person earning it.
How to read a PPP figure
A PPP conversion is best read as a statement about lifestyle, not about money transfers. If Parity Check tells you £2,000 a month in London is equivalent to a certain figure in Istanbul, it means roughly the same standard of living — not that the bank will give you that amount.
For anything involving an actual transfer of money, use the market rate. For anything involving a decision about where to live, work or price a product, the PPP figure is the more honest number.