Convert at purchasing power parity, not the market exchange rate. The exchange rate is set by trade and capital flows and answers what a currency is worth to buy another currency. Purchasing power parity is built from what a comparable basket of goods actually costs in each country, which is the question you are asking when you compare two salaries you would live on.
Two different questions
The market exchange rate answers: if I convert this money today, how much of the other currency do I get. That matters for a transfer, a holiday or a debt denominated abroad.
Purchasing power parity answers: how much of the other currency would I need to buy what this money buys here. That is the question behind every salary comparison, and the two answers can differ by thirty per cent or more.
Why they diverge
Exchange rates are set largely by things that are traded internationally, plus capital flows and monetary policy. A great deal of what you actually spend money on is not traded: rent, haircuts, childcare, restaurant meals, local transport. Those are priced by local wages, so countries with lower wages have systematically cheaper non-traded goods, and the exchange rate does not reflect that at all.
The practical consequence is that market rates understate living standards in lower-income countries and overstate them in higher-income ones.
Which figure to use
PPP conversion factors are published by international statistical bodies and updated regularly. They are not precise to the last percentage point and they are far better than the alternative — the gap between PPP and market rates is usually larger than the uncertainty in the PPP figure itself.
Where PPP misleads too
It is built from a national basket, and you do not buy the national basket. If you spend a large share on housing in a capital city, the national figure understates your costs; if you spend little and save a lot, it overstates them.
And savings are the clearest case: money you intend to move back home converts at the market rate, not at PPP. Someone working abroad for three years to save is genuinely helped by a strong exchange rate in a way a PPP comparison does not capture.
The practical rule
For “what standard of living would this salary buy me”, use PPP. For “how much money can I take home at the end”, use the exchange rate. Most people need both, for different parts of the same decision.
Common questions
Which conversion should I use for a salary comparison?
Purchasing power parity, because you are asking what the salary buys where it is earned. The exchange rate answers a different question.
Why do they differ so much?
Exchange rates are driven by traded goods and capital flows, while much of what you spend on is not traded and is priced by local wages. Market rates therefore understate living standards in lower-income countries.
When is the exchange rate the right tool?
For money you intend to move u2014 savings, remittances, or a debt denominated in another currency. Those convert at the market rate regardless of what things cost locally.
How accurate is PPP?
Not precise to the last percentage point, and the gap between PPP and market rates is usually much larger than that uncertainty. It is the better tool despite being approximate.
Does PPP account for my own spending?
No. It is built from a national basket. Heavy spending on capital-city housing means the national figure understates your costs, and heavy saving means it overstates them.