Why does the same income buy more in some countries than in others?

The same income buys more in some countries because a lot of what people buy is local, and local things are priced for local pockets. The exchange rate between two currencies is set by trade and financial markets, and it reflects the value of goods traded between countries rather than goods made for home use. A haircut, a rented room or a plate of local food never crosses a border, so its price need not follow the exchange rate.

That gap is why economists invented purchasing power parity, or PPP. It starts from the law of one price: with no transaction costs or trade barriers, a good should cost the same everywhere. If a computer costs 500 US dollars in New York and 2000 Hong Kong dollars in Hong Kong, PPP theory says the exchange rate should be 4 Hong Kong dollars to the dollar. A single good is a shaky guide, so statisticians price a whole basket of goods, with different quantities, in each place.

The result can change a country's picture dramatically. Converted at nominal exchange rates, India's GDP per person was about 1,965 US dollars in one widely quoted comparison. On a PPP basis, the same figure was about 7,197 international dollars. For a rich country the two numbers sit closer together: Denmark's was about 53,242 US dollars against 46,602 at PPP.

The exchange rate can also mislead for a simpler reason: it jumps around. If the Mexican peso fell by half against the dollar, Mexican GDP counted in dollars would halve too, though Mexicans would be no worse off if their incomes and prices in pesos stayed the same.