Purchasing power parity (PPP) is one of several economic indicators used to compare how much goods cost from country to country. If the exchange rate between two countries is in proper equilibrium, then those countries should have PPP. Once the exchange rate is taken into consideration, a bundle of goods costs the same in either place.
For example, suppose that the exchange rate between Canada and the United States is 1.5 to 1, meaning that $1.50 in Canadian dollars exchanges for $1 in U.S. dollars. Then, assuming PPP exists between the two nations, a bundle of goods that costs $10 in the U.S. should cost $15 in Canada.
As is often the case in economics, things are not that simple. Most countries do not have PPP with one another. Because of its status as the world's reserve currency, the U.S. dollar is used most often as a point of comparison. Developing countries in Africa, Asia and Eastern Europe generally have the lowest PPP, while Western European nations have the highest. Several methods are used to measure PPP; the exact order in which nations rank from low to high depends on the method used.
One popular method, the Big Mac Index, compares the price of the popular McDonald's hamburger in various countries. According to this index, Ukraine, Russia and India have the lowest PPP with respect to the U.S. as of February 2015. A Big Mac in Ukraine, when its price is converted to U.S. dollars, costs 74.9% less than it would in the U.S.
Another method, developed by the Organisation for Economic Co-operation and Development (OECD), measures how much a good that sells for $100 in the U.S. costs in various countries when its price is converted to U.S. dollars at the proper exchange rate. Using this method, the countries with the lowest PPP relative to the U.S. as of December 2014 include Poland ($55), Hungary ($56) and the Czech Republic ($64).