Many professionals go through the dilemma of considering offers from another country because of confusions related to pay and expenses. The most common confusion is, “My onsite pay feels good when I look at it in terms of my local currency, but is the pay really good considering the fact that I will have all my expenses in the other country currency ?”.
This is where the concept of Purchasing power parity comes in.
What is Purchasing Power Parity ?
Lets take an example to understand this – Suppose that 10 USD can buy 100 apples, and 5 Euros can buy 100 apples, then we can say that the Purchasing power of 10 USD is equal to the Purchasing power of 5 Euros. We can say that 10 USD and 5 Euros are at Purchasing power Parity.
In Simple words, Purchasing Power Parity is the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.
What is Purchasing Power view of salary & Exchange rate view of salary?
Real Example : Salary of Project Management Professional in India is 1,700,000 INR.
Exchange rate View of salary
At 2018 exchange rates, 1,700,000 INR = 25,959 USD i.e.. if you have 1,700,000 INR in hand, then you will get 25,959 USD if you convert that money to USD anywhere in the world.
Purchasing Power View of salary
Purchasing power Parity rate of 1,700,000 INR with respect to USD = 96,045 USD
It means the Purchasing power of 1,700,000 INR is equal to the purchasing power of 96,045 USD, i.e.. In United States, 96,045 USD will allow you to buy the same things you’d buy with 1,700,000 INR in India.
When to consider Purchasing Power, and when to consider Exchange rate ?
If your earning and majority expenses are in the same currency, then you should look at Purchasing power.
If your earning is in one country, but you remitt majority of your earnings to another country, then see that you have a favorable exchange rate.
Check the PMI’s 10th Project Management Salaries Survey results – in terms of Purchasing power parity.