What is PPP or Purchasing Power Parity - definition and use

Introduction

To compare the production of goods and services produced by any two countries (or GDP) in a given period of time ; economists must be familiar with PPP or purchasing power parity. But why do we need this ? Why we can't simply write GDPs side by side and compare them ?

Concept

First of all, suppose we have to do this experiment with USA and INDIA. Normally any country produces limitless kinds goods and services. For example, chair, table, biscuits, clothes, wheat, rice, softwares, banking, health services etc. We know wheat is measured in terms of Kgs or tons etc. But clothes can be measured in meters, inches etc. Using these quantities straight-forwardly is a vague idea. You can't compare wheat production of USA with that of INDIA, and then cloth production of USA with that of INDIA.

So this is clear that all these goods and services must be in monetary terms. But there are different currencies and different prices in both these countries. Firstly we must make comparison adding the monetary value of goods and services produced or GDP, this is a must. But there are two different currencies. So we have to first convert them in same currencies.

Let we want to convert INDIA'S GDP in US dollars. But how do we take each goods' quantity and multiply it by price of that good in USA. It's not the easiest one.

Now let's understand what PPP actually is and how it will be helping us with this problem. So PPP refers to ( in our example ) how many Rupees must be spent in INDIA to buy the same goods and services as much as a Dollar buys in USA. It is calculated through concentrating on a basket of goods that are produced by most of the countries in the world.

Hence, to make comparison of GDP of INDIA and USA, We have to first divide INDIA'S GDP (₹) by PPP.

Following is the data of GDP (PPP) of different countries in the world.