Purchasing power parity

Purchasing power parity (PPP) is a way of measuring economic variables in different countries so that irrelevant exchange rate variations do not distort comparisons. Purchasing power exchange rates are such that it would cost exactly the same number of, for example, US dollars to buy euros and then buy a basket of goods in the market as it would cost to purchase the same goods directly with dollars. The purchasing power exchange rate used in this conversion equals the ratio of the currencies' respective purchasing powers (reciprocals of their price levels).

In neoclassical economic theory, the purchasing power parity theory assumes that the exchange rate between two currencies actually observed in the foreign exchange market is the one that is used in the purchasing power parity comparisons, so that the same amount of goods could actually be purchased in either currency with the same beginning amount of funds. Depending on the particular theory, purchasing power parity is assumed to hold either in the long run or, more strongly, in the short run. Theories that invoke purchasing power parity assume that in some circumstances a fall in either currency's purchasing power (a rise in its price level) would lead to a proportional decrease in that currency's valuation on the foreign exchange market.

The concept of purchasing power parity allows one to estimate what the exchange rate between two currencies would have to be to equate the purchasing power of the two currencies. Observed deviations of the exchange rate from purchasing power parity are measured by deviations of the real exchange rate from its PPP value.

PPP exchange rates help costing but exclude profits and above all do not consider the different quality of goods among countries. The same product, for instance, can have a different level of quality and even safety in different countries, and may be subject to different taxes and transport costs. Since market exchange rates fluctuate substantially, when the GDP of one country measured in its own currency is converted to the other country's currency using market exchange rates, one country might be inferred to have higher real GDP than the other country in one year but lower in the other; both of these inferences would fail to reflect the reality of their relative levels of production. But if one country's GDP is converted into the other country's currency using PPP exchange rates instead of observed market exchange rates, the false inference will not occur. Essentially GDP measured at PPP controls for the different costs of living and price levels, usually relative to the United States dollar, enabling a more accurate estimate of a nation's level of production.

Concept

The idea originated with the School of Salamanca in the 16th century, and was developed in its modern form by Gustav Cassel in 1916, in The Present Situation of the Foreign Trade.[1][2] While Gustav Cassel’s use of PPP concept has been traditionally interpreted as his attempt to formulate a positive theory of exchange rate determination, the policy and theoretical context in which Cassel wrote about exchange rates suggests different interpretation.  In the years immediately preceding the end of WWI and following it economists and politicians were involved in discussions on possible ways of restoring the gold standard, which would automatically restore the system of fixed exchange rates among participating nations.  The stability of exchange rates was widely believed to be crucial for restoring the international trade and for its further stable and balanced growth.  Nobody then was mentally prepared for the idea that flexible exchange rates determined by market forces do not necessarily cause chaos and instability in the peaceful time (and that is what the abandoning of the gold standard during the war was blamed for).  Gustav Cassel was among those who supported the idea of restoring the gold standard, although with some alterations.  The question, which Gustav Cassel tried to answer in his works written during that period, was not how exchange rates are determined in the free market, but rather how to determine the appropriate level at which exchange rates were to be fixed during the restoration of the system of fixed exchange rates.  His recommendation was to fix exchange rates at the level corresponding to the PPP, as he believed that this would prevent trade imbalances between trading nations.  Thus, PPP doctrine proposed by Cassel was not really a positive theory of exchange rate determination (as Cassel was perfectly aware of numerous factors that prevent exchange rates from stabilizing at PPP level if allowed to float), but rather a normative policy advice, formulated in the context of discussions on returning to the gold standard[3].

The PPP concept is based on the law of one price, where in the absence of transaction costs and official trade barriers, identical goods will have the same price in different markets when the prices are expressed in the same currency.[4]

Another interpretation is that the difference in the rate of change in prices at home and abroad—the difference in the inflation rates—is equal to the percentage depreciation or appreciation of the exchange rate.

Deviations from parity imply differences in purchasing power of a "basket of goods" across countries, which means that for the purposes of many international comparisons, countries' GDPs or other national income statistics need to be "PPP-adjusted" and converted into common units. The best-known purchasing power adjustment is the Geary–Khamis dollar (the "international dollar"). The real exchange rate is then equal to the nominal exchange rate, adjusted for differences in price levels. If purchasing power parity held exactly, then the real exchange rate would always equal one. However, in practice the real exchange rates exhibit both short run and long run deviations from this value, for example due to reasons illuminated in the Balassa–Samuelson theorem.

There can be marked differences between purchasing power adjusted incomes and those converted via market exchange rates.[5] For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one Geary-Khamis dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity[6]—considerably different from the nominal exchange rate. This discrepancy has large implications; for instance, when converted via the nominal exchange rates GDP per capita in India is about US$1,965[7] while on a PPP basis it is about US$7,197.[8] At the other extreme, for instance Denmark's nominal GDP per capita is around US$53,242, but its PPP figure is US$46,602, in line with other developed nations.

Uses

The purchasing power parity exchange rate serves two main functions. PPP exchange rates can be useful for making comparisons between countries because they stay fairly constant from day to day or week to week and only change modestly if at all, from year to year. Second, over a period of years, exchange rates do tend to move in the general direction of the PPP exchange rate and there is some value to knowing in which direction the exchange rate is more likely to shift over the long run.

Measurement

The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries.[9]

Estimation of purchasing power parity is complicated by the fact that countries do not simply differ in a uniform price level; rather, the difference in food prices may be greater than the difference in housing prices, while also less than the difference in entertainment prices. People in different countries typically consume different baskets of goods. It is necessary to compare the cost of baskets of goods and services using a price index. This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries.

Thus, it is necessary to make adjustments for differences in the quality of goods and services. Furthermore, the basket of goods representative of one economy will vary from that of another: Americans eat more bread; Chinese more rice. Hence a PPP calculated using the US consumption as a base will differ from that calculated using China as a base. Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared.

Various ways of averaging bilateral PPPs can provide a more stable multilateral comparison, but at the cost of distorting bilateral ones. These are all general issues of indexing; as with other price indices there is no way to reduce complexity to a single number that is equally satisfying for all purposes. Nevertheless, PPPs are typically robust in the face of the many problems that arise in using market exchange rates to make comparisons.

For example, in 2005 the price of a gallon of gasoline in Saudi Arabia was US$0.91, and in Norway the price was US$6.27.[10] The significant differences in price would not contribute to accuracy in a PPP analysis, despite all of the variables that contribute to the significant differences in price. More comparisons have to be made and used as variables in the overall formulation of the PPP.

When PPP comparisons are to be made over some interval of time, proper account needs to be made of inflationary effects.

Law of one price

Although it may seem as if PPPs and the law of one price are the same, there is a difference: the law of one price applies to individual commodities whereas PPP applies to the general price level. If the law of one price is true for all commodities then PPP is also therefore true; however, when discussing the validity of PPP, some argue that the law of one price does not need to be true exactly for PPP to be valid. If the law of one price is not true for a certain commodity, the price levels will not differ enough from the level predicted by PPP.[11]

The purchasing power parity theory states that the exchange rate between one currency and another currency is in equilibrium when their domestic purchasing powers at that rate of exchange are equivalent.

Big Mac Index

Big Mac hamburger - Japan (3)
Big Mac hamburgers, like this one from Japan, are similar worldwide.

Another example of one measure of the law of one price, which underlies purchasing power parity, is the Big Mac Index, popularized by The Economist, which compares the prices of a Big Mac burger in McDonald's restaurants in different countries. The Big Mac Index is presumably useful because although it is based on a single consumer product that may not be typical, it is a relatively standardized product that includes input costs from a wide range of sectors in the local economy, such as agricultural commodities (beef, bread, lettuce, cheese), labor (blue and white collar), advertising, rent and real estate costs, transportation, etc.

In theory, the law of one price would hold that if, to take an example, the Canadian dollar were to be significantly overvalued relative to the U.S. dollar according to the Big Mac Index, that gap should be unsustainable because Canadians would import their Big Macs from or travel to the U.S. to consume them, thus putting upward demand pressure on the U.S. dollar by virtue of Canadians buying the U.S. dollars needed to purchase the U.S.-made Big Macs and simultaneously placing downward supply pressure on the Canadian dollar by virtue of Canadians selling their currency in order to buy those same U.S. dollars.[12][13]

The alternative to this exchange rate adjustment would be an adjustment in prices, with Canadian McDonald's stores compelled to lower prices to remain competitive. Either way, the valuation difference should be reduced assuming perfect competition and a perfectly tradable good. In practice, of course, the Big Mac is not a perfectly tradable good and there may also be capital flows that sustain relative demand for the Canadian dollar. The difference in price may have its origins in a variety of factors besides direct input costs such as government regulations and product differentiation.[11]

In some emerging economies, Western fast food represents an expensive niche product priced well above the price of traditional staples—i.e. the Big Mac is not a mainstream 'cheap' meal as it is in the West, but a luxury import. This relates back to the idea of product differentiation: the fact that few substitutes for the Big Mac are available confers market power on McDonald's. For example, in India, the costs of local fast food like vada pav are comparative to what the Big Mac signifies in the U.S.[14] Additionally, with countries such as Argentina that have abundant beef resources, consumer prices in general may not be as cheap as implied by the price of a Big Mac.

The following table, based on data from The Economist's January 2013 calculations, shows the under (−) and over (+) valuation of the local currency against the U.S. dollar in %, according to the Big Mac index. To take an example calculation, the local price of a Big Mac in Hong Kong when converted to U.S. dollars at the market exchange rate was $2.19, or 50% of the local price for a Big Mac in the U.S. of $4.37. Hence the Hong Kong dollar was deemed to be 50% undervalued relative to the U.S. dollar on a PPP basis.

Country or region Price level (% change with the US)[15]
India -58
South Africa -54
Hong Kong -50
Ukraine -47
Egypt -45
Russia -45
Taiwan -42
China -41
Malaysia -41
Sri Lanka -37
Indonesia -35
Mexico -34
Philippines -33
Poland -33
Bangladesh -32
Saudi Arabia -33
Thailand -33
Pakistan -32
Lithuania -30
Latvia -25
UAE -25
South Korea -22
Japan -20
Singapore -17
Estonia -16
Czech Republic -15
Argentina -13
Hungary -13
Peru -11
Israel -8
Portugal -8
United Kingdom -3
New Zealand -1
Chile 0
United States 0 (by definition)
Costa Rica +1
Greece +3
Austria +5
Netherlands +7
Ireland +8
Spain +9
Turkey +10
Colombia +11
Australia +12
Euro area +12
France +12
Germany +13
Finland +17
Belgium +18
Denmark +19
Italy +20
Canada +24
Uruguay +25
Brazil +29
Switzerland +63
Sweden +75
Norway +80
Venezuela +108

iPad Index

Like the Big Mac Index, the iPad index (elaborated by CommSec) compares an item's price in various locations. Unlike the Big Mac, however, each iPad is produced in the same place (except for the model sold in Brazil) and all iPads (within the same model) have identical performance characteristics. Price differences are therefore a function of transportation costs, taxes, and the prices that may be realized in individual markets. An iPad will cost about twice as much in Argentina as in the United States.

Country or region Price (US Dollars)[16][17][18][19]
Argentina $1,094.11
Australia $506.66
Austria $674.96
Belgium $618.34
Brazil $791.40
Brunei $525.52
Canada (Montréal) $557.18
Canada (no tax) $467.36
Chile $602.13
China $602.52
Czech Republic $676.69
Denmark $725.32
Finland $695.25
France $688.49
Germany $618.34
Greece $715.54
Hong Kong $501.52
Hungary $679.64
India $512.61
Ireland $630.73
Italy $674.96
Japan $501.56
Luxembourg $641.50
Malaysia $473.77
Mexico $591.62
Netherlands $683.08
New Zealand $610.45
Norway $655.92
Philippines $556.42
Pakistan $550.00
Poland $704.51
Portugal $688.49
Russia $596.08
Singapore $525.98
Slovakia $674.96
Slovenia $674.96
South Africa $559.38
South Korea $576.20
Spain $674.96
Sweden $706.87
Switzerland $617.58
Taiwan $538.34
Thailand $530.72
Turkey $656.96
UAE $544.32
United Kingdom $638.81
US (California) $546.91
United States (no tax) $499.00
Vietnam $554.08

KFC Index

Similar to the Big Mac Index, the KFC Index measures PPP amongst African countries, created by Sagaci Research (a market research firm focusing solely on Africa). Instead of comparing a Big Mac, this index compares a KFC Original 12/15 pc. bucket.

For example, the average price of KFC's Original 12 pc. Bucket in the United States in January 2016 was $20.50; while in Namibia it was only $13.40 at market exchange rates. Therefore, the index states the Namibian dollar was undervalued by 33% at that time.

OECD comparative price levels

Each month, the Organisation for Economic Co-operation and Development measures the difference in price levels between its member countries by calculating the ratios of PPPs for private final consumption expenditure to exchange rates. The OECD table below indicates the number of US dollars needed in each of the countries listed to buy the same representative basket of consumer goods and services that would cost US$100 in the United States

According to the table, an American living or travelling in Switzerland on an income denominated in US dollars would find that country to be the most expensive of the group, having to spend 62% more US dollars to maintain a standard of living comparable to the US in terms of consumption.

Country Price level (US = 100)[20]
Australia 123
Austria 99
Belgium 101
Canada 105
Chile 67
Czech Republic 59
Denmark 128
Estonia 71
Finland 113
France 100
Germany 94
Greece 78
Hungary 52
Iceland 111
Ireland 109
Israel 109
Italy 94
Japan 96
South Korea 84
Luxembourg 112
Mexico 66
Netherlands 102
New Zealand 118
Norway 134
Poland 51
Portugal 73
Slovak Republic 63
Slovenia 75
Spain 84
Sweden 109
Switzerland 162
Turkey 61
United Kingdom 121
United States 100

Measurement issues

In addition to methodological issues presented by the selection of a basket of goods, PPP estimates can also vary based on the statistical capacity of participating countries. The International Comparison Program, which PPP estimates are based on, require the disaggregation of national accounts into production, expenditure or (in some cases) income, and not all participating countries routinely disaggregate their data into such categories.

Some aspects of PPP comparison are theoretically impossible or unclear. For example, there is no basis for comparison between the Ethiopian laborer who lives on teff with the Thai laborer who lives on rice, because teff is not commercially available in Thailand and rice is not in Ethiopia, so the price of rice in Ethiopia or teff in Thailand cannot be determined. As a general rule, the more similar the price structure between countries, the more valid the PPP comparison.

PPP levels will also vary based on the formula used to calculate price matrices. Different possible formulas include GEKS-Fisher, Geary-Khamis, IDB, and the superlative method. Each has advantages and disadvantages.

Linking regions presents another methodological difficulty. In the 2005 ICP round, regions were compared by using a list of some 1,000 identical items for which a price could be found for 18 countries, selected so that at least two countries would be in each region. While this was superior to earlier "bridging" methods, which do not fully take into account differing quality between goods, it may serve to overstate the PPP basis of poorer countries, because the price indexing on which PPP is based will assign to poorer countries the greater weight of goods consumed in greater shares in richer countries.

Need for adjustments to GDP

The exchange rate reflects transaction values for traded goods between countries in contrast to non-traded goods, that is, goods produced for home-country use. Also, currencies are traded for purposes other than trade in goods and services, e.g., to buy capital assets whose prices vary more than those of physical goods. Also, different interest rates, speculation, hedging or interventions by central banks can influence the foreign-exchange market.

The PPP method is used as an alternative to correct for possible statistical bias. The Penn World Table is a widely cited source of PPP adjustments, and the associated Penn effect reflects such a systematic bias in using exchange rates to outputs among countries.

For example, if the value of the Mexican peso falls by half compared to the US dollar, the Mexican Gross Domestic Product measured in dollars will also halve. However, this exchange rate results from international trade and financial markets. It does not necessarily mean that Mexicans are poorer by a half; if incomes and prices measured in pesos stay the same, they will be no worse off assuming that imported goods are not essential to the quality of life of individuals. Measuring income in different countries using PPP exchange rates helps to avoid this problem.

PPP exchange rates are especially useful when official exchange rates are artificially manipulated by governments. Countries with strong government control of the economy sometimes enforce official exchange rates that make their own currency artificially strong. By contrast, the currency's black market exchange rate is artificially weak. In such cases, a PPP exchange rate is likely the most realistic basis for economic comparison. Similarly, when exchange rates deviate significantly from their long term equilibrium due to speculative attacks or carry trade, a PPP exchange rate offers a better alternative for comparison.

Extrapolating PPP rates

Since global PPP estimates—such as those provided by the ICP— are not calculated annually, but for a single year, PPP exchange rates for years other than the benchmark year need to be extrapolated.[21] One way of doing this is by using the country's GDP deflator. To calculate a country's PPP exchange rate in Geary–Khamis dollars for a particular year, the calculation proceeds in the following manner:[22]

Where PPPrateX,i is the PPP exchange rate of country X for year i, PPPrateX,b is the PPP exchange rate of country X for the benchmark year, PPPrateU,b is the PPP exchange rate of the United States (US) for the benchmark year (equal to 1), GDPdefX,i is the GDP deflator of country X for year i, GDPdefX,b is the GDP deflator of country X for the benchmark year, GDPdefU,i is the GDP deflator of the US for year i, and GDPdefU,b is the GDP deflator of the US for the benchmark year.

Difficulties

There are a number of reasons that different measures do not perfectly reflect standards of living.

Range and quality of goods

The goods that the currency has the "power" to purchase are a basket of goods of different types:

  1. Local, non-tradable goods and services (like electric power) that are produced and sold domestically.
  2. Tradable goods such as non-perishable commodities that can be sold on the international market (like diamonds).

The more that a product falls into category 1, the further its price will be from the currency exchange rate, moving towards the PPP exchange rate. Conversely, category 2 products tend to trade close to the currency exchange rate. (See also Penn effect).

More processed and expensive products are likely to be tradable, falling into the second category, and drifting from the PPP exchange rate to the currency exchange rate. Even if the PPP "value" of the Ethiopian currency is three times stronger than the currency exchange rate, it won't buy three times as much of internationally traded goods like steel, cars and microchips, but non-traded goods like housing, services ("haircuts"), and domestically produced crops. The relative price differential between tradables and non-tradables from high-income to low-income countries is a consequence of the Balassa–Samuelson effect and gives a big cost advantage to labour-intensive production of tradable goods in low income countries (like Ethiopia), as against high income countries (like Switzerland).

The corporate cost advantage is nothing more sophisticated than access to cheaper workers, but because the pay of those workers goes farther in low-income countries than high, the relative pay differentials (inter-country) can be sustained for longer than would be the case otherwise. (This is another way of saying that the wage rate is based on average local productivity and that this is below the per capita productivity that factories selling tradable goods to international markets can achieve.) An equivalent cost benefit comes from non-traded goods that can be sourced locally (nearer the PPP-exchange rate than the nominal exchange rate in which receipts are paid). These act as a cheaper factor of production than is available to factories in richer countries. It's difficult by the GDP PPP to consider the different quality of goods among the different countries.

The Bhagwati–Kravis–Lipsey view provides a somewhat different explanation from the Balassa–Samuelson theory. This view states that price levels for nontradables are lower in poorer countries because of differences in endowment of labor and capital, not because of lower levels of productivity. Poor countries have more labor relative to capital, so marginal productivity of labor is greater in rich countries than in poor countries. Nontradables tend to be labor-intensive; therefore, because labor is less expensive in poor countries and is used mostly for nontradables, nontradables are cheaper in poor countries. Wages are high in rich countries, so nontradables are relatively more expensive.[11]

PPP calculations tend to overemphasise the primary sectoral contribution, and underemphasise the industrial and service sectoral contributions to the economy of a nation.

Trade barriers and nontradables

The law of one price, the underlying mechanism behind PPP, is weakened by transport costs and governmental trade restrictions, which make it expensive to move goods between markets located in different countries. Transport costs sever the link between exchange rates and the prices of goods implied by the law of one price. As transport costs increase, the larger the range of exchange rate fluctuations. The same is true for official trade restrictions because the customs fees affect importers' profits in the same way as shipping fees. According to Krugman and Obstfeld, "Either type of trade impediment weakens the basis of PPP by allowing the purchasing power of a given currency to differ more widely from country to country."[11] They cite the example that a dollar in London should purchase the same goods as a dollar in Chicago, which is certainly not the case.

Nontradables are primarily services and the output of the construction industry. Nontradables also lead to deviations in PPP because the prices of nontradables are not linked internationally. The prices are determined by domestic supply and demand, and shifts in those curves lead to changes in the market basket of some goods relative to the foreign price of the same basket. If the prices of nontradables rise, the purchasing power of any given currency will fall in that country.[11]

Departures from free competition

Linkages between national price levels are also weakened when trade barriers and imperfectly competitive market structures occur together. Pricing to market occurs when a firm sells the same product for different prices in different markets. This is a reflection of inter-country differences in conditions on both the demand side (e.g., virtually no demand for pork in Islamic states) and the supply side (e.g., whether the existing market for a prospective entrant's product features few suppliers or instead is already near-saturated). According to Krugman and Obstfeld, this occurrence of product differentiation and segmented markets results in violations of the law of one price and absolute PPP. Over time, shifts in market structure and demand will occur, which may invalidate relative PPP.[11]

Differences in price level measurement

Measurement of price levels differ from country to country. Inflation data from different countries are based on different commodity baskets; therefore, exchange rate changes do not offset official measures of inflation differences. Because it makes predictions about price changes rather than price levels, relative PPP is still a useful concept. However, change in the relative prices of basket components can cause relative PPP to fail tests that are based on official price indexes.[11]

Global poverty line

The global poverty line is a worldwide count of people who live below an international poverty line, referred to as the dollar-a-day line. This line represents an average of the national poverty lines of the world's poorest countries, expressed in international dollars. These national poverty lines are converted to international currency and the global line is converted back to local currency using the PPP exchange rates from the ICP. PPP exchange rates include data from the sales of high end non-poverty related items which skews the value of food items and necessary goods which is 70 percent of poor peoples' consumption.[23] Angus Deaton argues that PPP indices need to be reweighted for use in poverty measurement; they need to be redefined to reflect local poverty measures, not global measures, weighing local food items and excluding luxury items that are not prevalent or are not of equal value in all localities.[24]

See also

References

  1. ^ Cassel, Gustav (December 1918). "Abnormal Deviations in International Exchanges". The Economic Journal. 28 (112): 413–415. doi:10.2307/2223329. JSTOR 2223329.
  2. ^ Cheung, Yin-Wong (2009). "purchasing power parity". In Reinert, Kenneth A.; Rajan, Ramkishen S.; Glass, Amy Jocelyn; et al. The Princeton Encyclopedia of the World Economy. I. Princeton: Princeton University Press. p. 942. ISBN 978-0-691-12812-2. Retrieved 2 October 2011.
  3. ^ Kadochnikov, Denis (2013). "Gustav Cassel's purchasing power parity doctrine in the context of his views on international economic policy coordination". European Journal of the History of Economic Thought. 20 (6): 1101–1121. doi:10.1080/09672567.2013.824999.
  4. ^ Krugman and Obstfeld (2009). International Economics. Pearson Education, Inc.
  5. ^ Daneshkhu, Scheherazade (18 December 2007). "China, India economies '40% smaller'". Financial Times.
  6. ^ 2005 World Development Indicators: Table 5.7 | Relative prices and exchange rates Archived 2007-02-23 at the Wayback Machine
  7. ^ List of countries by past and future GDP (nominal)
  8. ^ List of countries by future GDP (PPP) per capita estimates
  9. ^ Taylor and Taylor, Alan and Mark (Fall 2004). "The Purchasing Power Parity Debate" (PDF). Journal of Economic Perspectives. 18 (4): 135–158. doi:10.1257/0895330042632744.
  10. ^ "CNN/Money: Global gas prices".
  11. ^ a b c d e f g Krugman and Obstfeld (2009). International Economics. Pearson Education, Inc. pp. 394–395.
  12. ^ "The Big Mac index". The Economist. Retrieved 2017-06-13.
  13. ^ "The Big Mac Index". The Big Mac Index. Retrieved 2017-06-13.
  14. ^ Narasimhan, Anand; Dogra, Aparna (3 September 2012). "The case study: Goli Vada Pav". Financial Times. Retrieved 30 April 2014.
  15. ^ "Interactive currency-comparison tool". The Economist.
  16. ^ Glenda Kwek. "Is the Aussie too expensive? iPad index says no". The Age.
  17. ^ 23rd Sep 2013, CommSec Economic Insight: CommSec iPad Index
  18. ^ [1] Commonwealth Securities 23 September 2013
  19. ^ Liz Tay (September 23, 2013). "Here's How Much An iPad Costs In 46 Countries". Business Insider Australia.
  20. ^ as of 14 Apr 2015 "Monthly comparative price levels". OECD. 14 April 2015.
  21. ^ Paul Schreyer and Francette Koechlin (March 2002). "Purchasing power parities – measurement and uses" (PDF). Statistics Brief. OECD (3).CS1 maint: Uses authors parameter (link)
  22. ^ Paul McCarthy. "Chapter 18: Extrapolating PPPs and Comparing ICP Benchmark Results" (PDF). International Comparison Program. World Bank. p. 29.
  23. ^ Thomas Pogge on Global Poverty
  24. ^ Price indexes, inequality, and the measurement of world poverty Angus Deaton, Princeton University

External links

E7 (countries)

The E7 (short for "Emerging 7") is the seven countries China, India, Brazil, Mexico, Russia, Indonesia and Turkey, grouped together because of their major emerging economies. The term was coined by the economists John Hawksworth and Gordon Cookson at PricewaterhouseCoopers in 2006.The growth of the E7 countries has been characterized in comparison with its size versus the Group of Seven countries, which had made up many of the largest economies in the world in the 20th century. In 2011, the E7 were predicted to have larger economies than the G7 countries by 2020. By 2014, the E7 countries had passed the G7 countries based on purchasing power parity terms. Other estimates said the E7 were 80% of the G7 in 2016 in PPP. In 2016, another prediction estimated that the E7's economies would be larger than the G7 in 2030. PWC predicted that the E7 could be 75% larger than the G7 in PPP terms by 2050.

Geary–Khamis dollar

The Geary–Khamis dollar, more commonly known as the international dollar (Int'l. dollar or Intl. dollar, abbreviation: Int'l$., Intl$., Int$, G-K$ or GK$), is a hypothetical unit of currency that has the same purchasing power parity that the U.S. dollar had in the United States at a given point in time. It is widely used in economics and financial statistics for various purposes, most notably to determine and compare the purchasing power parity and gross domestic product of various countries and markets. The year 1990 or 2000 is often used as a benchmark year for comparisons that run through time. The unit is often abbreviated e.g. 2000 US dollar (if the benchmark year is 2000) or 2000 Int'l$.

It is based on the twin concepts of purchasing power parities (PPP) of currencies and the international average prices of commodities. It shows how much a local currency unit is worth within the country's borders. It is used to make comparisons both between countries and over time. For example, comparing per capita gross domestic product (GDP) of various countries in international dollars, rather than based simply on exchange rates, provides a more valid measure to compare standards of living. It was proposed by Roy C. Geary in 1958 and developed by Salem Hanna Khamis between 1970 and 1972.

Figures expressed in international dollars cannot be converted to another country's currency using current market exchange rates; instead they must be converted using the country's PPP exchange rate used in the study.

Greater Tokyo Area

The Greater Tokyo Area is the most populous metropolitan area in the world, consisting of the Kantō region of Japan, including Tokyo Metropolis, as well as the prefecture of Yamanashi of the neighboring Chūbu region. In Japanese, it is referred to by various terms, one of the most common being Capital Region (首都圏, Shuto-ken).

A 2016 United Nations estimate puts the total population at 38,140,000. It covers an area of approximately 13,500 km2 (5,200 mi2), giving it a population density of 2,642 person/km2. It is the second largest single metropolitan area in the world in terms of built-up or urban function landmass at 8,547 km2 (3,300 mi2), behind only New York City at 11,642 km2 (4,495 mi2).The area has the largest metropolitan economy in the world, with a total GDP (nominal) of approximately $2 trillion (¥165 trillion) in 2008. According to research published by PricewaterhouseCoopers, the agglomeration of Tokyo had a total GDP of $1.5 trillion in 2008 (at purchasing power parity), ranking again as the largest urban agglomeration GDP in the world.

Gross domestic product

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a period of time, often annually.GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing differences in living standards between nations.

International finance

International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.Sometimes referred to as multinational finance, international finance is additionally concerned with matters of international financial management. Investors and multinational corporations must assess and manage international risks such as political risk and foreign exchange risk, including transaction exposure, economic exposure, and translation exposure.Some examples of key concepts within international finance are the Mundell–Fleming model, the optimum currency area theory, purchasing power parity, interest rate parity, and the international Fisher effect. Whereas the study of international trade makes use of mostly microeconomic concepts, international finance research investigates predominantly macroeconomic concepts.

The three major components setting international finance apart from its purely domestic counterpart are as follows:

Foreign exchange and political risks.

Market imperfections.

Expanded opportunity sets.These major dimensions of international finance largely stem from the fact that sovereign nations have the right and power to issue currencies, formulate their own economic policies, impose taxes, and regulate movement of people, goods, and capital across their borders.The term "international finance" is sometimes also used as an anti-Semitic code word.

List of Asian and Pacific countries by GDP (PPP)

This is a list gross domestic product (GDP) at purchasing power parity (PPP) for the latest years recorded in the CIA World Factbook. All sovereign states with United Nations membership and territory in either Asia or Oceania are included on the list apart from those who are also members of the Council of Europe. In addition, the list includes the special administrative regions of China (Hong Kong and Macao). All dependent territories (including those under the control of states on this list) are excluded. The figures provided are quoted in US dollars and are 2016 estimates unless otherwise noted.

List of Latin American and Caribbean countries by GDP (PPP)

This is a list of Latin American and Caribbean countries by gross domestic product at purchasing power parity in international dollars according to the International Monetary Fund's estimates in the October 2018 World Economic Outlook database.

The Latin American countries Brazil, Mexico, and Argentina accounted for over two-thirds of the region's total gross domestic product (GDP) at purchasing power parity (PPP) in 2019, while Caribbean and North Atlantic nations represented just over 1% of the region's total GDP (PPP). The Bahamas had the region's highest GDP (PPP) per capita, whereas Haiti had the lowest.

Cuba is not included in the list due to lack of economic data. Puerto Rico is not listed since it is a U.S. territory.

List of North American countries by GDP (PPP)

This is a list of North American nations ranked by Gross Domestic Product (GDP) at Purchasing Power Parity (PPP). Figures are given in 2016 International Dollars according to International Monetary Fund 2016 figures.

List of North American countries by GDP (PPP) per capita

This is a list of North American nations by GDP per capita. All figures are based on the gross domestic product (at purchasing power parity) per capita, i.e., the purchasing power parity (PPP) value of all final goods and services produced within a country in a given year, divided by the average (or mid-year) population for the same year. The figures given are in international dollars and rounded to the nearest hundred. Names of dependent territories (not sovereign states) are in italics and are not ranked.

List of North American countries by GDP (nominal)

Gross domestic product (GDP) is the market value of all final goods and services from a nation in a given year. Countries in North America are sorted by nominal GDP estimates based on 2018 data from the World Economic Outlook by the International Monetary Fund.The figures presented here do not take into account differences in the cost of living in different countries, and the results can vary greatly from one year to another based on fluctuations in the exchange rates of the country's currency. Such fluctuations may change a country's ranking from one year to the next, even though they often make little or no difference to the standard of living of its population. Therefore, these figures should be used with caution.

Some countries/regions may have citizens which are on average wealthy. These countries/regions could appear in this list as having a small GDP. This would be because the country/region listed has a small population, and therefore small total economy; the GDP is calculated as the population times market value of the goods and services produced per person in the country.Comparisons of national wealth are also frequently made on the basis of purchasing power parity (PPP), to adjust for differences in the cost of living in different countries. PPP largely removes the exchange rate problem, but has its own drawbacks; it does not reflect the value of economic output in international trade, and it also requires more estimation than nominal GDP. On the whole, PPP per capita figures are more narrowly spread than nominal GDP per capita figures.

List of South American countries and dependencies by GDP (PPP)

This is a list of South American nations ranked by Gross Domestic Product (GDP) at Purchasing Power Parity (PPP) for the latest years recorded in the CIA World Factbook. The figures provided are quoted in US dollars and are 2017 estimates unless otherwise noted.

List of countries by GDP (PPP) per capita

This page is a list of the countries of the world by gross domestic product (at purchasing power parity) per capita, i.e., the purchasing power parity (PPP) value of all final goods and services produced within a country in a given year, divided by the average (or mid-year) population for the same year.

As of 2017, the average GDP per capita (PPP) of all of the countries of the world is US$17,300. For rankings regarding wealth, see list of countries by wealth per adult.

List of countries by GDP (PPP) per hour worked

The GDP (PPP) per hour worked is a measure of the productivity of a country when not taking into account unemployment or hours worked per week. GDP (PPP) stands for gross domestic product normalised to purchasing power parity.

List of countries by total health expenditure per capita

This article includes 3 lists of countries of the world and their total expenditure on health per capita. Total expenditure includes both public and private expenditures.

The first table and bar chart lists member countries of the Organisation for Economic Co-operation and Development (OECD). With each country's total expenditure on health per capita in PPP U.S. dollars.

The next 2 tables use data from the World Health Organization (WHO). One table uses U.S. dollars per capita. The other table uses 2011 PPP international US dollars (inflation-adjusted to 2011 dollars).

The chart to the right measures the total cost of health care (public and private expenditures) as a percent of GDP (gross domestic product) for a few nations. GDP is a measure of the total economy of a nation.

List of sovereign states and dependent territories in Europe by GDP (PPP)

This is a list of European nations sorted by their Gross Domestic Product (GDP), the value of all final goods and services produced within a nation in a given year. The GDP dollar estimates presented here are derived from purchasing power parity (PPP) calculations for the latest years recorded in the CIA World Factbook. The list includes all members of the Council of Europe, Belarus and Kosovo. The figures provided are all quoted in US dollars.

List of sovereign states in Europe by GDP (PPP) per capita

This is a map and list of European countries by GDP per capita at purchasing power parity for the year 2019 based on data from the International Monetary Fund.

Relative purchasing power parity

Relative purchasing power parity is an economic theory which predicts a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period. It is a dynamic version of the absolute purchasing power parity theory.

World economy

The world economy or global economy is the economy of the humans of the world, considered as the international exchange of goods and services that is expressed in monetary units of account. In some contexts, the two terms are distinct "international" or "global economy" being measured separately and distinguished from national economies while the "world economy" is simply an aggregate of the separate countries' measurements. Beyond the minimum standard concerning value in production, use and exchange the definitions, representations, models and valuations of the world economy vary widely. It is inseparable from the geography and ecology of Earth.

It is common to limit questions of the world economy exclusively to human economic activity and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult. Typical examples are illegal drugs and other black market goods, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.

However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy since exchange rates typically do not closely reflect worldwide value, for example in cases where the volume or price of transactions is closely regulated by the government.

Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real United States dollars or euros. However, the world economy can be evaluated and expressed in many more ways. It is unclear, for example, how many of the world's 7.62 billion people have most of their economic activity reflected in these valuations.

According to Maddison, until the middle of 19th century, global output was dominated by China and India. Waves of Industrial Revolution in Western Europe and Northern America shifted the shares to the Western Hemisphere. As of 2017, the following 15 countries or regions have reached an economy of at least US$2 trillion by GDP in nominal or PPP terms: Brazil, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Turkey, the United Kingdom, the United States and the European Union.

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