According to Investopedia, a Forbes digital company, PPP is defined as: "An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power."
That is, a can of Pepsi Cola must cost the same in the U.S. and anywhere in the world, all things being equal (which means no difference in transportation, distribution costs and the like). So if a can costs U.S. 80 cents, it must be around Rs 40 in India, if the exchange rate of U.S. $1 equals Rs 40.
Real expenditure controls differences in price levels for the same product expressed in the same currency.
PPP operates on the "law of one price." The most commonly cited PPP calculation is "The Economist" magazine's annual "Hamburger Index," which compares the price of a hamburger from McDonald's around the world. In-depth and wider research, such as that conducted by the World Bank, includes several goods and services, including the price of a meal, transportation and rent.
Gross national income (GNI) can be calculated using PPP.
According to the World Bank: "PPP GNI is measured in current international dollars which, in principle, have the same purchasing power as a dollar spent on GNI in the U.S. economy. Because PPPs provide a better measure of the standard of living of residents of an economy, they are the basis for the World Bank's calculations of poverty rates at $1 and $2 a day."
PPP is not always an accurate indicator. For example, in the absence of public transportation, a car might be a necessity in the U.S. for transporting people to work--whereas, in developing nations where people bicycle or ride bullock carts over long distances, a car might be considered a luxury. In other words, people consume different goods and services in different countries.