The purchasing power of a currency refers to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and services.  Purchasing power is clearly determined by the relative cost of living and inflation rates in different countries. Purchasing power parity means equalising the purchasing power of two currencies by taking into account these cost of living and inflation differences.  PPP exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.  In terms of PPP dollars, India is the third largest economy in the world.