How does the PKS affect the global economy and our money?

Key Points:

• PPP is a method that allows for the objective comparison of the purchasing power of currencies in different countries through the analysis of the cost of typical goods.
• GDP adjusted for PPP provides a much more accurate picture of economic development and the standard of living of the population in the world.
• Understanding PKS is important for people in countries with weak currencies, as it affects their ability to utilize alternative assets, including digital currencies and stablecoins.

Introduction: Why does the same amount of money cost differently in different places?

Imagine a simple situation: a cup of coffee that costs 5 dollars in New York will cost you less than 1 dollar in the Philippines. A pair of shoes that costs 150 dollars in the US may cost half that amount in Mexico. This is not just a price difference — it reflects a deeper principle that economists call purchasing power parity (PPP).

The PKC is not just an abstract economic concept, but a practical tool that helps us understand the real value of money in different parts of the world. It allows us to see how people actually live in other countries and how far their income can stretch.

Fundamental principle: The law of one price

The basis of the PPP is the concept that economists refer to as the law of one price. The idea is quite simple: if there were no trade barriers, taxes, and logistics costs, absolutely identical goods would cost the same all over the world — taking into account the exchange rate.

Let's consider a specific example. Suppose a smartphone costs 600 US dollars in an American store and 66,000 Japanese yen in Tokyo. According to the logic of PPP, the exchange rate should be approximately 110 yen per one US dollar.

However, in the real world, everything is more complicated. Local taxes, logistics costs, delivery expenses, differences in supply and demand—all of this diverts actual prices from theoretical PPP. That is why economists use a basket of goods—a set of everyday items (products, clothing, energy, housing) that people purchase in each country. By comparing the cost of this basket around the world, a much more accurate assessment of relative currency strength can be obtained.

Why the PKS is critically important for understanding the global economy

Outside the confines of academic offices, GDP has practical significance for millions of people. When experts discuss the economic development of a country, they usually refer to the GDP indicator (gross domestic product). However, simple GDP often misleads.

Suppose the GDP per capita in a certain Asian country is $3,000 per year at the official exchange rate. This sounds very poor. However, if we apply a PPP adjustment, taking into account the much lower cost of living, the same GDP figure may equivalently amount to $10,000. Suddenly, the standard of living looks quite acceptable.

That is why international organizations, such as the IMF and the World Bank, are increasingly using GDP adjusted for PPP instead of regular GDP. This provides a clearer picture of how global wealth is actually distributed and how people truly live in different regions.

Practical application: Comparison of the standard of living

One of the most useful features of the PCI is the ability to adequately compare the standard of living between countries. A salary of $40,000 a year can provide you with a decent living in Manhattan, but the same amount will allow you to live very comfortably in many other parts of the world.

PCS helps people who are considering relocation or labor migration to realistically assess their prospects. This is also important for companies that determine the salary levels for employees in different countries.

Long-term exchange rate forecasts

Exchange rates fluctuate due to numerous factors — geopolitical situation, financial markets, interest rates. However, in the long term, they tend to revert to levels offered by the PCK. This allows analysts to make more reliable predictions about currency behavior over the years.

Detection of short-sighted monetary policy

Sometimes governments try to artificially keep their currency at an inflated level to make it look stronger than it actually is. The PCN serves as a tool that helps detect such manipulations and assess the true value of the currency, leaving behind the official rhetoric.

PCS in Action: From Big Macs to Real Compensation for Workers

One of the most amusing and practical ways to understand PPP is the Big Mac Index, created by The Economist. The idea is brilliantly simple: since the Big Mac from McDonald's is similar in almost every country, its price in different places serves as a data point for assessing PPP.

If a Big Mac costs 5 dollars in the USA but only 2.50 dollars in India, it immediately indicates that the Indian rupee is cheaper than the American dollar in terms of purchasing power. Later, other similar indicators appeared — Apple's iPad Index, KFC Index — which allow for a quick assessment of PPP through items familiar to everyone.

These simple examples have serious implications for large businesses. International companies use the principles of PKC to determine how prices for the same product should differ in different countries in order to remain profitable while also being fair to local consumers.

PCN Restrictions: When Theory Meets Reality

Unfortunately, the PKS is not a panacea. One of the main problems is the quality of goods. A product that costs more in one country may be of higher quality, even if it looks the same on the outside. Comparing prices does not always mean comparing equivalent items.

Another serious issue concerns goods that are not traded on the international market — real estate, local services, hairdressing services, electricity. The prices for these services depend on local circumstances and can vary significantly, disrupting the logic of the PPC.

Inflation also poses a constant challenge. The CPI implies relative price stability, but in reality, inflation continuously alters the picture. CPI data that was relevant a few months ago may already be outdated.

How Understanding the CPS Helps to Assess the World of Cryptocurrencies

Although the PKS and cryptocurrency markets are not directly linked like traditional Forex markets, this concept provides valuable insight into how people in different countries interact with digital assets.

Bitcoin and other cryptocurrencies are global assets not tied to any state. However, for residents of countries with weak currencies ( based on the PPP ), acquiring cryptocurrency can prove to be a significantly more expensive task. This makes cryptocurrencies a potential tool for hedging against currency devaluation, especially in countries experiencing hyperinflation.

In countries with weak national currencies and high inflation rates, stablecoins ( cryptocurrencies pegged to stable assets ) acquire particular practical value. People can convert their local money into stablecoins to protect their accumulated purchasing power from erosion due to inflation. In this scenario, understanding the PCS helps to assess whether it is beneficial for a particular person to make such a conversion.

Conclusions: PKS as the Key to Understanding the World

Purchasing power parity is a powerful lens through which to view the global economy, pricing, and living standards. Although the PPP method is far from perfect, it provides an important basis for comparing the economic strength of countries beyond official exchange rates and bare GDP numbers.

Regardless of whether you are engaged in analytics, forecasting currency movements, planning international business, or simply curious about why the world looks economically different depending on where you are, PKS provides you with a tool for better understanding these differences. This concept helps us understand not only the numbers but also the real life behind these figures.