Purchase Power Parity
Categories: Econ
See: Purchasing Power.
Not all currencies are created equal. It might cost you $9 for a solid meal of chicken and rice in the U.S., but go to Thailand and you can get it for 60 baht (about $2).
Why? This is purchase power parity (PPP). Macroecon measure of the differences in standards of living and productivity between nations.
The PPP for chicken and rice? It’s always the cost of a good in one currency divided by the cost of the same good in the other country’s currency. Here, that means $9 divided by $2 = 4.5.
Why is this? The biggest factors are the cost of land to rent the restaurant and the cost of labor. Those things are much cheaper in Thailand than they are in the U.S., making the rice and chicken cheaper. They’re cheaper because Thailand has a lower GDP per capita and lower standards of living. It also means that Thailand has a lot of room to grow...and it is growing. The PPP gap between higher GDP per capita nations and Thailand, as well as other “tiger economies,” is shrinking as they grow. Vacationers, expats, and investors are flocking to Thailand, taking advantage of this PPP, spending their dollars, which also boosts the economy, creating a lot of growth.
Usually though, PPP is calculated with baskets of goods rather than getting super-specific about the PPP of a spicy bean burrito with extra cheese. The World Bank tracks PPP of large baskets of goods and compares them across nations, which it reports every three years in U.S. dollars. Think: transport costs, tax differences, market competition (thanks, regulations), labor costs...you get the picture. The big one.
Who else is into the PPP party? The International Monetary Fund, the Organization for Economic Cooperation, and even forex traders (currency traders).
Top PPP dog driver? The U.S...we’re number one! In this case, anyway. Number two and three are China and India...the big’uns. Four and five are Japan and Germany, respectively. Lands of classy cars.
Related or Semi-related Video
Finance: What is Purchasing Power?5 Views
finance a la Shmoop what is purchasing power well it basically refers to how
far a dollar goes in buying stuff that you you know care about you just got
your paycheck for the week netting you three hundred forty two dollars after [paycheck document]
blue state taxes today that can buy a few pairs of really nice shoes or a [supermarket checkout]
romantic candlelit dinner with wine in Manhattan or a gluten-free bread maker [romantic dinner table with wine]
from the fine people at williams-sonoma yeah you know you can advertise on us so
don't be shy there now hop in our Wayback Machine
let's visit what this $342 of modern america purchasing power could have
bought you in 1792 well here's a house listed right off the Potomac for three [shack for sale]
hundred forty two dollars that would work big pool there in the back well
could have bought you these six thousand acres of land in Pennsylvania or it [beautiful landscape]
could have bought you this jet if well you know if Jets had been invented yet
okay modern era time let's check out Chad the poorest country on the planet
it looks a lot like America in 1792 as far as purchasing power goes that same
romantic candlelit dinner that was three hundred forty two dollars in Manhattan [romanic dinner for $342]
well here it is for three dollars and forty two cents okay the basic idea here [roast pig for $3.42]
is that a dollar is not a dollar everywhere throughout history and
throughout the world inflation affects the purchasing power
of a dollar over time local wealth of a given area is also a big influence well
the demand for dollars versus a country's local currency is another
factor like when the Soviet Union fell under Gorbachev and Reagan they prized
hard currencies like the US dollar massively over their own country's ruble [one dollar bill in sky]
which kind of evaporated in value yes re there reppu Tanja's keeping it real and [russian money and Putin]
purchasing power metrics are a big thing mainly as they relate to old people who
can't really earn money on their own or at least not enough to fully pay their [coins falling down]
bills and when inflation roars while old people suffer more than other categories [lady walking down street and meets lion]
of citizen because their portfolios are usually invested in pretty safe low
interest bond that don't adjust to inflation and whose
value is destroyed in times of high inflation as their purchasing power kind
of erodes so yeah I don't be old if you can help it really makes it tough to
afford that gluten-free bread maker but you could see an advertisement for right [frazzled lady]
here rev William Sonoma would just get off their butts and write us a check