The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable
baskets of goods to compare purchasing power across countries.
Estimation of purchasing power parity is complicated by the fact that countries do not simply differ in a uniform
price level; rather, the difference in food prices may be greater than the difference in housing prices, while also less than the difference in entertainment prices. People in different countries typically consume different baskets of goods. It is necessary to compare the cost of baskets of goods and services using a
price index. This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries.
Thus, it is necessary to make adjustments for differences in the quality of goods and services. Furthermore, the basket of goods representative of one economy will vary from that of another: Americans eat more bread; Chinese more rice. Hence a PPP calculated using the US consumption as a base will differ from that calculated using China as a base. Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared.
