The idea of Purchasing Power Parity

General Office - The idea of Purchasing Power Parity

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With increased globalization of markets for goods, services, finance, labor and ideas, the need to measure and correlate the standards of living between countries has become important. Output of goods or services and their prices, which showcases the accepted of living, is very important for many habitancy like foreign investors, traders, and potential immigrants as it helps them spend their money in a sensible way.

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When it comes to comparing the value of money in terms of buying products or goods in two dissimilar countries, change rate often comes to our mind. change rates are generally used to turn the current values of currency in one country to another. But, change rates ignore the domestic economic sectors. Therefore, change rate does not communicate the real volume of Output of the goods or services that can be bought.

Therefore, to know the differences between the real prices of goods and services across dissimilar countries, we need something to measure them on a base scale. This is where Purchasing Power Parity (Ppp) comes into picture. Purchasing Power Parity converts local currencies to a base currency and compares the buying power of dissimilar currencies.

The purchasing power parity is a recipe of measuring the efficient purchasing power of dissimilar countries' currencies over the same types of goods and services. It also states that, in ideally efficient markets, same goods should have similar price. While comparing the Purchasing Power Parities of dissimilar countries, a accepted singular currency should be taken in to consideration, such as a Us dollar.

But goods and services have widely varying prices across countries when converted to a base currency. You can find more differences in goods or services which are not traded with other countries on international platform such as products that are sold locally, costs of labor, housing, construction, and healthcare services. That is the reason we get more amount of haircuts in India compared to Us with the same amount of money. This also one of the reasons many foreign companies set up their offices and control from India. Ppp is also the main thing in development the offshoring possible.

Ppp is the best recipe to correlate the standards of living in dissimilar countries. According to The United Nations Statistics department (Unsd), the purchasing power parity conversion factor of India compared to Us dollar is 16.537 in 2007. Purchasing power parity conversion factor is defined as the required amount of units of a country's currency to buy the same amount of goods and services in their local store as one U.S. Dollar would buy in the United States of America. In other words, when a person spends Rs.45 in Us to buy a goods in his country, you can get the same goods in India at Rs.16.50 only. This means products in India are roughly three times cheaper than in the Us.

The Ppp's law of one price states that all the prices of goods or services should equalize in the absence of local taxes, distributors margin and shipping charges. But the price differences are less for goods that are widely traded in international markets like electronic goods, machinery and equipment. This theory of Ppp does not work with countries like India. This is the reason some of the electronic goods and high-end cars are high-priced in India than in Us.

There are some differences in the prices of goods and services between India and Us. Local goods, labor, food, housing, healthcare etc. Are cheap in India but some items like electronic goods, and high-end cars are overpriced. Therefore, be aware of things that are high-priced and make sensible purchases.

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