You could be earning $100,000!

Even if you stay in India!

Jul 31, 2022

Reading Time: 3.5 minutes

If you know anyone staying abroad (let’s take US for example), you must have heard them say how expensive the place is. In fact, some people are able to save more in India these days than in the US. That’s because India is a relatively cheaper country if you want to buy something, compared to the US.

So when you hear someone earning $ 100,000 in the US, and you earn about 25 lakhs in India, you could actually be better of financially then them.

Let me tell you why..

For that, you’ll first need to understand the concept of Purchasing Power Parity (PPP). Don’t worry, 3 minutes and you’ll get it! 😎

So PPP is an economic theory that compares different countries’ currencies, not with a foreign exchange rate, but with a “basket of goods” approach.

For example, if you were to take two hypothetical baskets of the same products (most commonly used by humans) and compare the price of the entire basket in India and US, the prices will (obviously) be different. If the basket costs USD 10 in the US and INR 150 in India, that means that the PPP value is 150/10 = 15.

Now, this means that (to a large extent) if something costs 1 dollar in the US, it’ll cost 15 rupees in India. Something that costs 5 dollars in US will cost 75 rupees in India, and so on.

This is basically Purchasing Power Parity (or PPP), which shows a comparison between 2 currencies.

A simplistic formula for PPP (as you may have guessed it already) is

PPP = (Cost of basket in currency 1/Cost of basket in currency 2)

PPP is very different from the market’s “foreign exchange rate”, which depends on a lot of factors like demand and supply of both currencies. PPP, as the name suggests, considers mainly the “Purchasing Power” of your money in two different countries and currencies. So while the USD-INR exchange rate is roughly Rs. 80 per dollar, the PPP would be very different (we’ll see the current PPP value at the end of the article, so just stay hooked for another 2 minutes)

An interesting concept known as the “Big Mac Index” actually exists, which uses the price of a “Big Mac” - the most well-known burger at McDonalds, to compute PPP between two countries. So instead of the basket we spoke about, this concept compares the prices of the Big Mac in two currencies and then calculates the PPP.

For example, A Big Mac costs £3.69 in Britain and US$5.15 in the United States. So the implied PPP is (3.69/5.15) = 0.72.

Fun fact - The Big Mac Index was created by “The Economist” as a lighthearted guide to whether currencies are at their correct levels. However, today this is taught in economics textbooks around the world 😁

One problem with PPP is that it is difficult to calculate. For a truly meaningful comparison, the basket would have to contain a wide variety of goods and services. The amount of data that has to be collected by a financial institution is huge, and it can be a complex process.

Now here’s an interesting fact - the PPP for INR and USD is 22 (as per World Bank data). This means that for everything that costs 1 dollar in US, the same thing will cost 22 rupees in India.

Now, if you were to have a salary of USD 100,000 in US, that would roughly mean an equivalent salary of about Rs. 22 lakhs in India. Because if you’re earning 22 lakhs in India, your expenses (and therefore lifestyle) will probably be equivalent to someone earning $100,000 in the US! 😁

(To put it in perspective, a salary of USD 75,000 is considered decently okay in US).

So if you’re someone who’s looking for greener pastures abroad because of the income, consider this and do more research. Also, if you have a friend who lives (or is considering moving) abroad, why don’t you share this article with them on WhatsApp?

By the way, I’m planning to make this a bi-weekly newsletter (sent twice a week - on Wednesday and Sunday). Let me know if you’d like to receive two articles a week instead of one article. I’ll do it only if there are enough people who want it, so please just comment or reply to this email and let me know?

Till then. Adios!

PS: If you’re not reading this article on email, why don’t you subscribe to the newsletter and keep yourself updated with one interesting money management email every Sunday?