PPP then computes an inflation and exchange rate as the ratio of the price of the basket in one location to the price of the basket in the other location. The PPP term accounts for this by using a basket of goods, that is, many goods with different quantities. Poverty, tariffs, transportation and other frictions prevent trading and purchasing of various goods, so measuring a single good can cause a large error. If its price is 500 US dollars in New York and the same computer costs 2,000 HK dollars in Hong Kong, PPP theory says the exchange rate should be 4 HK dollars for every 1 US dollar. Ideally, a computer in New York and in Hong Kong should have the same price. It is based on the law of one price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location.

Purchasing power parity is an economic term for measuring prices at different locations.

3.4 Differences in price level measurement.The calculation of the PPP, according to the OECD, is made through a basket of goods that contains a 'final product list covers around 3,000 consumer goods and services, 30 occupations in government, 200 types of equipment goods and about 15 construction projects'. The Purchasing Power Parity indicator can be used to compare economies regarding their GDP, labour productivity and actual individual consumption, and in some cases to analyse price convergence and to compare the cost of living between places. The PPP inflation and exchange rate may differ from the market exchange rate because of tariffs, and other transaction costs. In many cases, PPP produces an inflation rate equal to the price of the basket of goods at one location divided by the price of the basket of goods at a different location. Purchasing power parity ( PPP) is the measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries' currencies, and, to some extent, their people's living standards. Please consider expanding the lead to provide an accessible overview of all important aspects of the article. This article's lead section may be too short to adequately summarize the key points.

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