Measuring purchasing power is an effective way to track economic recovery after the pandemic, estimate the real sizes of economies, and gauge poverty.

Price differences make it challenging to measure and compare economies because incomes and expenditures are worth more in terms of goods and services where prices are low, and less where prices are high.

An example where this comes into play is the measurement of extreme poverty around the world. If the current international poverty threshold of $1.90 a day is converted into local currencies using market exchange rates, the resulting amounts can purchase more commodities where prices are lower, and fewer where prices are higher, making poverty indicators biased.

This is why the poverty threshold, along with many other indicators for the Sustainable Development Goals, is instead converted based on "purchasing power parities."

Purchasing power parities convert different currencies to a common reference currency and, in the process of conversion, make adjustments for price differences.

A version of this article appears in the print on April 20, 2021, of The Himalayan Times.