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Purchasing Power Parity (PPP) of Gross Domestic Product for the countries of the world as of 2003. The economy of the United States is used as a reference, so that country is set at 100. Bermuda has the highest index value, 154, thus goods sold in Bermuda are 54% more expensive than in the United States.
.The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power.^ The theory uses the long-term balance exchange rates of the currencies in question to make equal their purchasing power.
  • Purchasing Power Parity · Economics · iTaxRebate.com 16 January 2010 18:018 UTC www.itaxrebate.com [Source type: FILTERED WITH BAYES]

^ An equilibrium condition, satisfied by any good theory of exchange rates.

^ Relative purchasing power parity (RPPP) .
  • Forbes: Financial Glossary 16 January 2010 18:018 UTC www.forbes.com [Source type: News]

.Based on a theory proposed by the School of Salamanca in the 16th century [1], it was developed in its modern form by Gustav Cassel in 1918,[2] it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price.^ PPP. The basis for PPP is the law of one price.
  • Purchasing Power 16 January 2010 18:018 UTC www.alshindagah.com [Source type: FILTERED WITH BAYES]

^ Power parity purchasing is based on the “law of one price”.
  • Purchasing Power Parity - Forex PPP 16 January 2010 18:018 UTC www.studyforex.com [Source type: FILTERED WITH BAYES]

^ The Law of One Price states that in an efficient market where there is free flow of goods, services and capital a commodity has only one price regardless of the country in which it is purchased.
  • Free International Fisher Effect (Purchasing Power Parity and Interest Rate Parity) spreadsheet. 16 January 2010 18:018 UTC www.spreadsheetml.com [Source type: General]

.The purchasing power rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.^ The theory behind PPP is that it equalizes the purchasing power of different currencies.
  • Purchasing Power, Bankruptcy Articles, Determining Purchasing Power 16 January 2010 18:018 UTC www.legalhelpers.com [Source type: FILTERED WITH BAYES]

^ This proposition states that the rate of appreciation of a currency is equal to the difference in inflation rates between the foreign and the home country.
  • Purchasing Power Parity 16 January 2010 18:018 UTC fx.sauder.ubc.ca [Source type: FILTERED WITH BAYES]
  • Purchasing Power 16 January 2010 18:018 UTC www.alshindagah.com [Source type: FILTERED WITH BAYES]

^ A purchasing power parity exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]
  • Real exchange rate - Hobson's Choice 16 January 2010 18:018 UTC www.jamesrmaclean.com [Source type: FILTERED WITH BAYES]

.Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal gross domestic product (GDP) comparison.^ It gives a clearer picture of a country's economy than by comparing their gross domestic product (GDP) using exchange rates.
  • Purchasing Power, Bankruptcy Articles, Determining Purchasing Power 16 January 2010 18:018 UTC www.legalhelpers.com [Source type: FILTERED WITH BAYES]

^ PPP takes these variables into account.
  • Purchasing Power Parity Method, Economics Theory, Business, Market Information 16 January 2010 18:018 UTC www.moneyinstructor.com [Source type: FILTERED WITH BAYES]

^ What is the difference between relative PPP and absolute PPP? .
  • Malaysia: (overview), purchasing power parity, customs and tradition 16 January 2010 18:018 UTC en.allexperts.com [Source type: FILTERED WITH BAYES]

.The best-known and most-used purchasing power parity exchange rate is the Geary-Khamis dollar (the "international dollar").^ CHAPTER 30 Purchasing Power Parity .
  • The International Economics Study Center | Finance Chapter 30: Purchasing Power Parity 16 January 2010 18:018 UTC internationalecon.com [Source type: Academic]

^ Relative purchasing power parity (RPPP) .
  • Forbes: Financial Glossary 16 January 2010 18:018 UTC www.forbes.com [Source type: News]

^ How exchange rates are determined: purchasing power parity .
  • CFM12090 - Understanding corporate finance: foreign exchange: purchasing power parity 16 January 2010 18:018 UTC www.hmrc.gov.uk [Source type: General]

.PPP exchange rate (the "real exchange rate") fluctuations are mostly due to market exchange rate movements.^ PPP represents the exchange rate of currency 1 to currency 2.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

^ PPP exchange rate .
  • Actual Exchange Rates in the Developing Worldand Purchasing Power Parity 16 January 2010 18:018 UTC www.haver.com [Source type: General]

^ Nominal exchange rate/PPP rate .
  • RIETI - How Far is the Yuan from its Purchasing Power Parity? 16 January 2010 18:018 UTC www.rieti.go.jp [Source type: FILTERED WITH BAYES]

.Aside from this volatility, consistent deviations of the market and PPP exchange rates are observed, for example (market exchange rate) prices of non-traded goods and services are usually lower where incomes are lower.^ It is consistently rejected when commodity prices are included and the exchange rate is floating.
  • International Economics - Topics 16 January 2010 18:018 UTC intl.econ.cuhk.edu.hk [Source type: FILTERED WITH BAYES]
  • International Economics - Topics 16 January 2010 18:018 UTC intl.econ.cuhk.edu.hk [Source type: FILTERED WITH BAYES]

^ Is reversion to PPP in euro exchange rates non-linear?.
  • The Purchasing Power Parity Debate 16 January 2010 18:018 UTC www.atypon-link.com [Source type: Academic]

^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.(A U.S. dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States).^ What is the exchange rate between the Japanese yen and the United States dollar?
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: FILTERED WITH BAYES]
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

^ In addition, one U.S. dollar buys more in the United States than one Canadian dollar buys in Canada.
  • IHS Global Insight // Our Perspective 16 January 2010 18:018 UTC www.ihsglobalinsight.com [Source type: Original source]

^ What is the exchange rate between the British pound and the United States dollar?
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: FILTERED WITH BAYES]
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

.PPP takes into account this lower cost of living and adjusts for it as though all income was spent locally.^ PPP takes these variables into account.
  • Purchasing Power Parity Method, Economics Theory, Business, Market Information 16 January 2010 18:018 UTC www.moneyinstructor.com [Source type: FILTERED WITH BAYES]

^ I’m not sure that PPP accounts for lower European costs with regard to healthcare.
  • GDP Per Capita :The Thinker 16 January 2010 18:018 UTC jeffreyellis.org [Source type: General]

^ I would also accept 7 because I think true PPP takes into account the local level of income.

.In other words, PPP is the amount of a certain basket of basic goods which can be bought in the given country with the money it produces.^ In other words, if a basket of goods was the same in different countries, a unit of currency should buy the same amount of that basket.
  • Forex Big Mac Attacks! - Forex - Futures Magazine 16 January 2010 18:018 UTC www.futuresmag.com [Source type: FILTERED WITH BAYES]

^ Thus, PPP refers to the basket of basic goods that can be bought with the currency of a given country.
  • Purchasing Power Parity, PPP 16 January 2010 18:018 UTC www.economywatch.com [Source type: General]

^ To even out the power of the dollar or any other strong monetary unit over certain currencies, economists take into account each country's cost of living and not the direct conversion, when pricing goods.
  • Purchasing Power Parity Method 16 January 2010 18:018 UTC www.investor-info.ca [Source type: FILTERED WITH BAYES]

.There can be marked differences between PPP and market exchange rates.^ In a free market the rate of exchange between countries having inconvertib...
  • Questions about Purchasing Power Parity Theory - Ask.com 16 January 2010 18:018 UTC www.ask.com [Source type: General]
  • Questions about Purchasing Power Parity - Ask.com 16 January 2010 18:018 UTC www.ask.com [Source type: General]

^ What is the difference between relative PPP and absolute PPP? .
  • Malaysia: (overview), purchasing power parity, customs and tradition 16 January 2010 18:018 UTC en.allexperts.com [Source type: FILTERED WITH BAYES]

^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

[3] .For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one United States dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity [4] — considerably different from the nominal exchange rate that put one dollar equal to 7.6 yuan.^ How exchange rates are determined: purchasing power parity .
  • CFM12090 - Understanding corporate finance: foreign exchange: purchasing power parity 16 January 2010 18:018 UTC www.hmrc.gov.uk [Source type: General]

^ What is purchasing power parity ?
  • Questions about Purchasing Power Parity Theory - Ask.com 16 January 2010 18:018 UTC www.ask.com [Source type: General]

^ See also interest parity and purchasing power parity .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

.This discrepancy has large implications; for instance, GDP per capita in the People's Republic of China is about US$1,800 while on a PPP basis it is about US$7,204. This is frequently used to assert that China is the world's second-largest economy, but such a calculation would only be valid under the PPP theory.^ GDP per capita (PPP) is estimated at $600.
  • The Southern African Development Community - SouthAfrica.info 16 January 2010 18:018 UTC www.southafrica.info [Source type: FILTERED WITH BAYES]

^ Under the old calculation, China had a GDP of $8.8 trillion, about 15% of global GDP of $59 trillion.
  • World Bank updates purchasing power parity calculations 16 January 2010 18:018 UTC nextbigfuture.com [Source type: News]

^ GDP per capita.
  • STATISTIK AUSTRIA - Purchasing Power Parities 16 January 2010 18:018 UTC www.statistik.at [Source type: FILTERED WITH BAYES]

At the other extreme, Denmark's nominal GDP per capita is around US$62,100, but its PPP figure is only US$37,304.

Contents

PPP measurement

.The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries.^ This purchasing power exchange rate equalises the purchasing power of different currencies in their home countries for a given basket of goods.
  • FXdirekt Bank AG: Glossary 16 January 2010 18:018 UTC www.fxdirekt.com [Source type: FILTERED WITH BAYES]

^ You cannot compare the PPP for to countries.
  • http://www.strategypage.com/militaryforums/69-23955.aspx 16 January 2010 18:018 UTC www.strategypage.com [Source type: FILTERED WITH BAYES]

^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.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.^ Download the latest OECD statistics on purchasing power parities and comparative price levels.
  • Purchasing Power Parities (PPP):Department 16 January 2010 18:018 UTC www.oecd.org [Source type: FILTERED WITH BAYES]

^ CHAPTER 30 Purchasing Power Parity .
  • The International Economics Study Center | Finance Chapter 30: Purchasing Power Parity 16 January 2010 18:018 UTC internationalecon.com [Source type: Academic]

^ Purchasing power parity -- OECD countries -- Mathematical models.
  • Project MUSE - Subject Browse 16 January 2010 18:018 UTC muse.jhu.edu [Source type: Academic]

.People in different countries typically consume different baskets of goods.^ People in different countries typically consume different baskets of goods.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ Goods are not identical in different countries.
  • Boyes/Melvin Economics: Fundamental Questions 16 January 2010 18:018 UTC college.cengage.com [Source type: General]

^ One is the difference that might exist between the consumption profile of an average MBA graduate and that represented by the basket of “standard” consumer goods from which PPP rates for each country are derived.
  • FT.com / Global MBA 2007 - Purchasing power parity rates: Meaningful comparisons mark the choice of methodology 16 January 2010 18:018 UTC www.ft.com [Source type: News]

.It is necessary to compare the cost of baskets of goods and services using a price index.^ Baskets of goods and services are not comparable accross borders.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

^ It is necessary to compare the cost of baskets of goods and services using a price index.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ What products are included in the basket of goods and services used for the calculation of PPPs?
  • Purchasing Power Parities (PPPs) Frequently Asked Questions 16 January 2010 18:018 UTC www.oecd.org [Source type: FILTERED WITH BAYES]

.This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries.^ This is a difficult task because purchasing patterns and even the goods available to purchase differ across countries.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ Goods are not identical in different countries.
  • Boyes/Melvin Economics: Fundamental Questions 16 January 2010 18:018 UTC college.cengage.com [Source type: General]

^ Because exchange rates do not necessarily reflect the relative purchasing powers of different currencies within countries, the use of exchange rates as a converter for international comparisons could show relationships in price and output levels that did not actually exist.
  • Comparison of purchasing power parity between the United States and Canada | Monthly Labor Review | Find Articles at BNET 16 January 2010 18:018 UTC findarticles.com [Source type: FILTERED WITH BAYES]

.Thus, it is necessary to make adjustments for differences in the quality of goods and services.^ Thus, it is necessary to make adjustments for differences in the quality of goods and services.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ An important difference is the choice of the goods and services making up the basket.
  • Comparison of purchasing power parity between the United States and Canada | Monthly Labor Review | Find Articles at BNET 16 January 2010 18:018 UTC findarticles.com [Source type: FILTERED WITH BAYES]

^ Thus one PPS buys the same volume of goods and services in all countries.
  • EUROPA - Press Releases - GDP per inhabitant in purchasing power standards - GDP per inhabitant in the Member States ranged from 41% to 276% of the EU27 average in 2008 16 January 2010 18:018 UTC europa.eu [Source type: Reference]
  • EUROPA - Press Releases - GDP per inhabitant in purchasing power standards , GDP perinhabitant in the Member States ranged from 37% to 280% of the EU27 average in2006 16 January 2010 18:018 UTC europa.eu [Source type: Reference]

.Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared.^ Additional statistical difficulties arise with multilateral comparisons when (as is usually the case) more than two countries are to be compared.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ The idea behind the Law of One Price is that if a commodity costs more in one country than the other, arbitrage will be possible by moving the commodity from the country with lower price to the one with the higher price.
  • Free International Fisher Effect (Purchasing Power Parity and Interest Rate Parity) spreadsheet. 16 January 2010 18:018 UTC www.spreadsheetml.com [Source type: General]

^ This book, designed for students taking a basic introductory course in statistical analysis, is far more than just a book of tables.
  • Purchasing Power Parity and Real Exchange Rates 16 January 2010 18:018 UTC www.routledgepolitics.com [Source type: FILTERED WITH BAYES]

.When PPP comparisons are to be made over some interval of time, proper account needs to be made of inflationary effects.^ Sometimes, PPP comparisons are made against some base country.
  • Should 1 DM (deutschmark) be equal to 40 Macedonian denars? 16 January 2010 18:018 UTC samvak.tripod.com [Source type: FILTERED WITH BAYES]

^ When PPP comparisons are to be made over some interval of time, proper account needs to be made of inflationary effects.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ That's because I address some of the assumptions made re PPP, and why I think your theoretical don't work.
  • http://www.strategypage.com/militaryforums/69-23955.aspx 16 January 2010 18:018 UTC www.strategypage.com [Source type: FILTERED WITH BAYES]

Big Mac Index

Big Mac hamburgers, like this one from Japan, are similar worldwide.
.An example of one measure of PPP is the Big Mac Index popularized by The Economist, which looks at the prices of a Big Mac burger in McDonald's restaurants in different countries.^ Our basket is a McDonald's Big Mac, produced in 120 countries.
  • Economist.com 16 January 2010 18:018 UTC www.stanford.edu [Source type: General]

^ Ten years of the Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

^ One of the most famous examples of PPP is the Economist’s Big Mac Index.
  • Which Currencies are Overvalued and Undervalued? | Kathy Lien | FX360.com 16 January 2010 18:018 UTC www.fx360.com [Source type: General]

.If a Big Mac costs US$4 in the United States and GBP£3 in the United Kingdom, the PPP exchange rate would be £3 for $4. The Big Mac Index is presumably useful because it is based on a well-known good whose final price, easily tracked in many countries, 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.^ It is consistently rejected when commodity prices are included and the exchange rate is floating.
  • International Economics - Topics 16 January 2010 18:018 UTC intl.econ.cuhk.edu.hk [Source type: FILTERED WITH BAYES]
  • International Economics - Topics 16 January 2010 18:018 UTC intl.econ.cuhk.edu.hk [Source type: FILTERED WITH BAYES]

^ In the United States a Big Mac cost $2.49.
  • Which Currencies are Overvalued and Undervalued? | Kathy Lien | FX360.com 16 January 2010 18:018 UTC www.fx360.com [Source type: General]

^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.The Big Mac Index is inaccurate in certain cases because of the different market conditions that exist in differing McDonald's locations.^ Ten years of the Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

^ An alternative Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

^ Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

.For instance, a Big Mac in downtown Chicago is likely to be priced higher than one in Wisconsin.^ Unlike Big Macs, it has a fixed price.
  • vaes9: The iPod as a Purchasing Power Parity Measure? 16 January 2010 18:018 UTC vaes9.codedgraphic.com [Source type: General]

^ The idea behind the Law of One Price is that if a commodity costs more in one country than the other, arbitrage will be possible by moving the commodity from the country with lower price to the one with the higher price.
  • Free International Fisher Effect (Purchasing Power Parity and Interest Rate Parity) spreadsheet. 16 January 2010 18:018 UTC www.spreadsheetml.com [Source type: General]

^ The cost of mailing a Big Mac from New York to Paris is more than the price difference.
  • Boyes/Melvin Economics: Fundamental Questions 16 January 2010 18:018 UTC college.cengage.com [Source type: General]

.Such pricing differences existing in one country demonstrate the imperfection of the Big Mac Index.^ Ten years of the Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

^ One of the efficient tools for calculating PPP is the Big Mac Index.
  • Purchasing Power Parity, PPP 16 January 2010 18:018 UTC www.economywatch.com [Source type: General]

^ An alternative Big Mac index .
  • Big Mac index: exchange-rate theory | The Economist 16 January 2010 18:018 UTC www.economist.com [Source type: General]

In addition, in some emerging economies western fast food represents an expensive niche product price 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 for the middle classes and foreigners. Although it is not perfect, the index still offers significant insight and an easy example to the understanding of PPP.

Need for PPP adjustments to GDP

Gross domestic product (by purchasing power parity) in 2006
.The exchange rate only reflects traded goods in contrast to non-traded ones.^ Traded vs. Non-traded Goods .
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ If the cost is high, it is a non-traded good.
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ The extent to which an exchange rate change is reflected in the prices of imported goods.
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

.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.^ Some goods are more readily marketable than others.
  • Chapter 11—Money and Its Purchasing Power(continued) 16 January 2010 18:018 UTC mises.org [Source type: FILTERED WITH BAYES]

^ The prices of traded goods will tend to be similar to those in developed economies.
  • Food for Thought: The Big Mac Index - - CFO.com 16 January 2010 18:018 UTC www.cfo.com [Source type: News]

^ The PPP rate can—especially in the short run—deviate by a large amount from the market exchange rate between two currencies, given the influence of trade, capital flows, and other factors on market exchange rates.
  • IMF Survey: Global Growth Estimates Trimmed After PPP Revisions 16 January 2010 18:018 UTC www.imf.org [Source type: News]

.Also, different interest rates, speculation, hedging or interventions by central banks can influence the foreign-exchange market.^ What is the relationship between domestic and foreign interest rates and changes in the exchange rate?
  • Boyes/Melvin Economics: Fundamental Questions 16 January 2010 18:018 UTC college.cengage.com [Source type: General]

^ The central bank acted as an open market seller of the dollars to stabilize the exchange rate.
  • The purchasing power parity and the Russian ruble. - Entrepreneur.com 16 January 2010 18:018 UTC www.entrepreneur.com [Source type: Academic]

^ Differences in interest rates do predict exchange rate changes.
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

.The PPP method is used as an alternative.^ A better method is to use purchasing-power parities (PPP), which take account of price differences.
  • Food for Thought: The Big Mac Index - - CFO.com 16 January 2010 18:018 UTC www.cfo.com [Source type: News]

^ The main method used to compute PPP exchange rates is a version of the 'EKS' system.
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ The EKS method, which is the main method used by the OECD-Eurostat PPP Programme, does not use either a reference price structure or a reference volume structure when estimating real expenditures.
  • Purchasing Power Parities (PPPs) Frequently Asked Questions 16 January 2010 18:018 UTC www.oecd.org [Source type: FILTERED WITH BAYES]

.For example, if the value of the Mexican peso falls by half compared to the U.S. dollar, the Mexican Gross Domestic Product measured in dollars will also halve.^ Gross Domestic Product (GDP) Gross Domestic Product (GDP) is the broadest measure of performance of an economy.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

^ There are three lists of countries of the world sorted by their gross domestic product (GDP) (the value of all final goods and services produced within a nation in a given year).
  • purchasing power parity - Ask.com Search 16 January 2010 18:018 UTC dictionary.reference.com [Source type: FILTERED WITH BAYES]

^ This entry gives the gross domestic product (GDP) or value of all final goods and services produced within a nation in a given year.
  • 1-language.com - The ESL Site: The World Factbook 2002 Online -- Field Listing - GDP 16 January 2010 18:018 UTC www.1-language.com [Source type: FILTERED WITH BAYES]

.However, this exchange rate results from international trade and financial markets.^ The international financial market where exchange rates are determined is called the foreign exchange market .
  • Notes on Mishkin Chapter 17 (Econ 353, Tesfatsion) 16 January 2010 18:018 UTC www.econ.iastate.edu [Source type: FILTERED WITH BAYES]

^ However, financial market conditions play a major role on the movement of exchange rates.
  • Purchasing Power Parity (PPP) as a Theory of Exchange Rate Determination 16 January 2010 18:018 UTC www.forex-trading-gurus.com [Source type: FILTERED WITH BAYES]

^ The PPP rate can—especially in the short run—deviate by a large amount from the market exchange rate between two currencies, given the influence of trade, capital flows, and other factors on market exchange rates.
  • IMF Survey: Global Growth Estimates Trimmed After PPP Revisions 16 January 2010 18:018 UTC www.imf.org [Source type: News]

.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.^ Thus, when expenditures on gross domestic product (GDP) for different countries are converted into a common currency by means of PPP indices, they are expressed at the same set of international prices, so that comparisons among countries reflect only differences in the volume of goods and services purchased.
  • Glossary 16 January 2010 18:018 UTC nces.ed.gov [Source type: FILTERED WITH BAYES]

^ Definition: The Gini index measures the extent to which the distribution of income (or in some cases consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.
  • EarthTrends Poverty Resource 16 January 2010 18:018 UTC earthtrends.wri.org [Source type: FILTERED WITH BAYES]

^ "The Penn effect denies this convergence; it is clear evidence that the general price level is much higher where (dollar) incomes are high, with no tendency to match the cheaper prices in poorer countries."
  • http://www.strategypage.com/militaryforums/69-23955.aspx 16 January 2010 18:018 UTC www.strategypage.com [Source type: FILTERED WITH BAYES]

.Measuring income in different countries using PPP exchange rates helps to avoid this problem.^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ PPP exchange rate .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

^ The use of PPP rates PPP exchange rates can be thought of as 'spatial' price indexes.
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.PPP exchange rates are especially useful when official exchange rates are artificially manipulated by governments.^ At the official exchange rate, its GDP is 1.5% of ours.
  • Purchasing Firepower Parity | Economics | The American Scene 16 January 2010 18:018 UTC theamericanscene.com [Source type: Original source]

^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ The use of PPP rates PPP exchange rates can be thought of as 'spatial' price indexes.
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.Countries with strong government control of the economy sometimes enforce official exchange rates that make their own currency artificially strong.^ At the official exchange rate, its GDP is 1.5% of ours.
  • Purchasing Firepower Parity | Economics | The American Scene 16 January 2010 18:018 UTC theamericanscene.com [Source type: Original source]

^ [Foreign exchange rates and currency policy.

^ An exchange rate is the price of one country's currency in terms of another.
  • Notes on Mishkin Chapter 17 (Econ 353, Tesfatsion) 16 January 2010 18:018 UTC www.econ.iastate.edu [Source type: FILTERED WITH BAYES]

.By contrast, the currency's black market exchange rate is artificially weak.^ PPP represents the exchange rate of currency 1 to currency 2.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

^ E = the exchange rate between the two currencies.
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ The PPP rate can—especially in the short run—deviate by a large amount from the market exchange rate between two currencies, given the influence of trade, capital flows, and other factors on market exchange rates.
  • IMF Survey: Global Growth Estimates Trimmed After PPP Revisions 16 January 2010 18:018 UTC www.imf.org [Source type: News]

.In such cases a PPP exchange rate is likely the most realistic basis for economic comparison.^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ In the above case, the equilibrium rate will likely remain at 1:2.
  • Chapter 11—Money and Its Purchasing Power(continued) 16 January 2010 18:018 UTC mises.org [Source type: FILTERED WITH BAYES]

^ The rates at this level are the PPP exchange rates for that economy.
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

Difficulties

The main reasons why different measures do not perfectly reflect standards of living are
  • PPP numbers can vary with the specific basket of goods used, making it a rough estimate.
  • Differences in quality of goods are hard to measure and thereby reflect in PPP.
.PPP calculations are often used to measure poverty rates.^ 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.
  • Glossary 16 January 2010 18:018 UTC nces.ed.gov [Source type: FILTERED WITH BAYES]

^ This is frequently used to assert that China is the world's second largest economy, but such a calculation would only be valid under the PPP theory.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ GDP is estimated at US$5.05-billion at the official exchange rate and $17.27-billion using purchasing power parity (PPP).
  • The Southern African Development Community - SouthAfrica.info 16 January 2010 18:018 UTC www.southafrica.info [Source type: FILTERED WITH BAYES]

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 (e.g.^ There are three lists of countries of the world sorted by their gross domestic product (GDP) (the value of all final goods and services produced within a nation in a given year).
    • purchasing power parity - Ask.com Search 16 January 2010 18:018 UTC dictionary.reference.com [Source type: FILTERED WITH BAYES]

    ^ It is the market value of all final goods and services made in a country within a year.
    • The world's largest economies : Rediff.com Business 16 January 2010 18:018 UTC business.rediff.com [Source type: News]

    ^ David Parsley, of Vanderbilt University, and Shang-Jin Wei, of the International Monetary Fund, estimate that non-traded inputs, such as labour, rent and electricity, account for between 55% and 64% of the price of a Big Mac*.
    • John Quiggin » The purchasing power parity hypothesis in Europe 16 January 2010 18:018 UTC johnquiggin.com [Source type: General]

    diamonds).
.The more a product falls into category 1 the further its price will be from the currency exchange rate.^ [Foreign exchange rates and currency policy.

^ An exchange rate is the price of one country's currency in terms of another.
  • Notes on Mishkin Chapter 17 (Econ 353, Tesfatsion) 16 January 2010 18:018 UTC www.econ.iastate.edu [Source type: FILTERED WITH BAYES]

^ PPP represents the exchange rate of currency 1 to currency 2.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

.(Moving towards the PPP exchange rate.^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ PPP exchange rate .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

^ A variant of PPP predicts that exchange rates move with the inflation rate.
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

) .Conversely, category 2 products tend to trade close to the currency exchange rate.^ [Foreign exchange rates and currency policy.

^ PPP represents the exchange rate of currency 1 to currency 2.
  • Purchasing Power Parity (PPP) 16 January 2010 18:018 UTC www.maxi-pedia.com [Source type: General]

^ This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate.
  • Forex forecast, Currency forecast - NZD/USD 16 January 2010 18:018 UTC www.fxcm.com [Source type: General]

.(For more details of why, see: Penn effect).^ Penn Effect also accounts for why you cannot compare PPP's.
  • http://www.strategypage.com/militaryforums/69-23955.aspx 16 January 2010 18:018 UTC www.strategypage.com [Source type: FILTERED WITH BAYES]

^ But with out a fix for this huge Bluetooth issue I see why many are passing on the Phone and returning them/The wired Hands Free just dot cut it any more!
  • Issue 1181 - android - [VoiceDial] Voice confirmation for Voice Dialer - Project Hosting on Google Code 16 January 2010 18:018 UTC code.google.com [Source type: General]

^ See the UN Handbook of the International Comparison Programme for more detail.
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

.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.^ Who is responsible for PPP exchange rates?
  • 2.5.6 Purchasing Power Parity Exchange Rates 16 January 2010 18:018 UTC www.esds.ac.uk [Source type: General]

^ PPP exchange rate .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

^ The chart that is then created compares the PPP of a currency with its actual exchange rate.
  • Which Currencies are Overvalued and Undervalued? | Kathy Lien | FX360.com 16 January 2010 18:018 UTC www.fx360.com [Source type: General]

.Even if the PPP "value" of the Chinese currency is five times stronger than the currency exchange rate, it won't buy five times as much of internationally traded goods like steel, cars and microchips, but non-traded goods like housing, services ("haircuts"), and domestically produced rice.^ Traded vs. Non-traded Goods .
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ The chart that is then created compares the PPP of a currency with its actual exchange rate.
  • Which Currencies are Overvalued and Undervalued? | Kathy Lien | FX360.com 16 January 2010 18:018 UTC www.fx360.com [Source type: General]

^ [Foreign exchange rates and currency policy.

.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 China), as against high income countries (like Switzerland).^ The Big Mac is not a tradable good and its price does vary between locations in any given country.
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: FILTERED WITH BAYES]
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

^ If the cost is high, it is a non-traded good.
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ But the prices of non-tradable products, such as housing and labour-intensive services, are generally much lower.
  • Food for Thought: The Big Mac Index - - CFO.com 16 January 2010 18:018 UTC www.cfo.com [Source type: News]

.The corporate cost advantage is nothing more sophisticated than access to cheaper workers, but because the pay of those workers goes further in low-income countries than high, the relative pay differentials (inter-country) can be sustained for longer than would be the case otherwise.^ Nothing would please me more than to be proven wrong.
  • EURO AND GOLD PRICE MANIPULATION - Print Version 16 January 2010 18:018 UTC www.gold-eagle.com [Source type: FILTERED WITH BAYES]

^ When it comes to PPP, you are taking into account agricultural products or raw materials that are going to be cheaper in developing countries, so it's not such a good way to measure this, especially when the telecom operators in developing countries are paying the same price more or less as those from developed countries.

^ However, the ability to buy more is precisely the reason why exchange rates are unsuitable for comparing the costs of goods internationally, because they fail to "reflect the actual purchasing power of currencies in their respective countries."
  • Riding for Education | Purchasing Power Parity gets a makeover in 2005 16 January 2010 18:018 UTC r4e.org [Source type: News]

.(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.^ This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate.
  • Forex forecast, Currency forecast - NZD/USD 16 January 2010 18:018 UTC www.fxcm.com [Source type: General]

^ For example, if the average price received per bushel of wheat during the base period was 98 cents, and, if the prices paid by farmers for other goods quadrupled, then the parity price for wheat would be $3.92 per bushel.
  • parity (economics) -- Britannica Online Encyclopedia 16 January 2010 18:018 UTC www.britannica.com [Source type: FILTERED WITH BAYES]

^ Most in the BOP lack good access to markets to sell their labor, handicrafts, or crops and have no choice but to sell to local employers or to middlemen who exploit them.
  • Scaling Mobile Services for Development: What Will It Take? A MobileActive.org White Paper | MobileActive.org 16 January 2010 18:018 UTC mobileactive.org [Source type: FILTERED WITH BAYES]

) .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).^ Is reversion to PPP in euro exchange rates non-linear?.
  • The Purchasing Power Parity Debate 16 January 2010 18:018 UTC www.atypon-link.com [Source type: Academic]

^ Traded vs. Non-traded Goods .
  • Lecture 8: Inflation 16 January 2010 18:018 UTC www.personal.kent.edu [Source type: FILTERED WITH BAYES]

^ PPP exchange rate .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

.These act as a cheaper factor of production than is available to factories in richer countries.^ VII.52 Under these acts 554,000,000 silver dollars were coined, although less than 20 per cent of them have ever been in actual circulation.
  • Fisher, The Purchasing Power of Money, Chapter VII | Library of Economics and Liberty 16 January 2010 18:018 UTC www.econlib.org [Source type: Original source]

^ Note, however, that these are not the only factors considered in deciding the classification of countries.
  • World Economic Outlook - Frequently Asked Questions 16 January 2010 18:018 UTC www.imf.org [Source type: FILTERED WITH BAYES]

^ Total factor productivity attempts to measure the overall productivity of the inputs used by a firm or a country.
  • Economics A-Z | Economist.com 16 January 2010 18:018 UTC www.economist.com [Source type: FILTERED WITH BAYES]
  • Economics A-Z | Economist.com 16 January 2010 18:018 UTC media.economist.com [Source type: FILTERED WITH BAYES]

.PPP calculations tend to overemphasise the primary sectoral contribution and underemphasise the industrial and service sectoral contributions to the economy of a nation.^ 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.
  • Glossary 16 January 2010 18:018 UTC nces.ed.gov [Source type: FILTERED WITH BAYES]

^ This is frequently used to assert that China is the world's second largest economy, but such a calculation would only be valid under the PPP theory.
  • Kooky Plan: the wiki for entrepreneurs / PPP 16 January 2010 18:018 UTC kookyplan.pbworks.com [Source type: FILTERED WITH BAYES]

^ While traditional natural resource sectors such as agriculture, forestry, and fisheries are still important in industrial-country economies, the relative economic and political significance of other [..
  • Search Results: "caspian sea" OR "Purchasing power parity" OR "PPP" OR "GNI" OR "Gross National Income" OR "economy" OR "poverty", page 4 - Maps and Graphics at UNEP/GRID-Arendal 16 January 2010 18:018 UTC maps.grida.no [Source type: FILTERED WITH BAYES]

Clarification to PPP Numbers of the IMF

.The GDP number for all reporting areas are one number in the reporting areas local currency.^ How strong (or weak) the currency is - is one important consideration but to say that it incorporates all the available information would be to miss the point.
  • Should 1 DM (deutschmark) be equal to 40 Macedonian denars? 16 January 2010 18:018 UTC samvak.tripod.com [Source type: FILTERED WITH BAYES]

^ A. We do not report the value of constant price GDP in a common currency (say U.S. dollars) for the world.
  • World Economic Outlook - Frequently Asked Questions 16 January 2010 18:018 UTC www.imf.org [Source type: FILTERED WITH BAYES]

^ PPP currency values are the number of units of a local currency required to buy the same quantity of comparable goods and services in the local market as one U.S. dollar would buy in an "average country" (in an average of all the countries).
  • Should 1 DM (deutschmark) be equal to 40 Macedonian denars? 16 January 2010 18:018 UTC samvak.tripod.com [Source type: FILTERED WITH BAYES]

.Therefore, in the local currency the PPP and market (or government) exchange rate is always 1.0 to its own currency, so the PPP and market exchange rate GDP number is always per definition the same for any duration of time, anytime, in that area's currency.^ Exchange rate, NCU per US$ .
  • Table: Exchange Rates and PPPs by Indicator, Country and Year 16 January 2010 18:018 UTC w3.unece.org [Source type: Reference]

^ At the official exchange rate, its GDP is 1.5% of ours.
  • Purchasing Firepower Parity | Economics | The American Scene 16 January 2010 18:018 UTC theamericanscene.com [Source type: Original source]

^ The chart that is then created compares the PPP of a currency with its actual exchange rate.
  • Which Currencies are Overvalued and Undervalued? | Kathy Lien | FX360.com 16 January 2010 18:018 UTC www.fx360.com [Source type: General]

.The only time the PPP exchange rate and the market exchange rate can differ is when the GDP number is converted into another currency.^ PPP converted GDPs make better economic sense than do exchange rate converted GDPs.
  • Purchasing Power Parities (PPPs) Frequently Asked Questions 16 January 2010 18:018 UTC www.oecd.org [Source type: FILTERED WITH BAYES]

^ At the official exchange rate, its GDP is 1.5% of ours.
  • Purchasing Firepower Parity | Economics | The American Scene 16 January 2010 18:018 UTC theamericanscene.com [Source type: Original source]

^ PPP exchange rate .
  • International Economics Glossary: P 16 January 2010 18:018 UTC www-personal.umich.edu [Source type: FILTERED WITH BAYES]

.Only because of different base numbers (because of for example "current" or "constant" prices, or an annualized or averaged number) are the USD to USD PPP exchange rate not 1.0, see the IMF data here: [1].^ [This will depend on the current exchange rate.
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

^ PPP is often very different from the current market exchange rate.
  • Economics A-Z | Economist.com 16 January 2010 18:018 UTC www.economist.com [Source type: FILTERED WITH BAYES]
  • Economics A-Z | Economist.com 16 January 2010 18:018 UTC media.economist.com [Source type: FILTERED WITH BAYES]

^ [Answers will depend on what the current exchange rates are.
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

.The PPP exchange rate is 1.023 from 1980 to 2002, and the "constant" and "current" price is the same in 2000, because that's the base year for the "constant" (inflation adjusted) currency.^ Q. What is the constant price base year for GDP? Is it constant across all countries?
  • World Economic Outlook - Frequently Asked Questions 16 January 2010 18:018 UTC www.imf.org [Source type: FILTERED WITH BAYES]

^ Exchange rates and inflation / Rudiger Dornbusch.

^ [This will depend on the current exchange rate.
  • EconEdLink | The Big Mac Index 16 January 2010 18:018 UTC www.econedlink.org [Source type: General]

See also

Notes

  1. ^ Alan M. Taylor y Mark P. Taylor (2004) "The Purchasing Power Parity Debate," NBER Working Paper No. 10607 (online).
  2. ^ Gustav Cassel, "Abnormal Deviations in International Exchanges," in Economic Journal, (December, 1918), 413-415
  3. ^ FT.com / World - China, India economies ‘40% smaller’:By Scheherazade Daneshkhu in London Published: December 18 2007 18:04
  4. ^ 2005 World Development Indicators: Table 5.7 | Relative prices and exchange rates

External links


Simple English

There are two ways to measure GDP (total income of a country) of different countries and compare them. One way, called GDP at exchange rate, is when the currencies of all countries are converted into USD (United States Dollar). The second way is GDP (PPP) or GDP at Purchasing Power Parity (PPP).

Contents

PPP

Uses

Purchasing Power Parity (PPP) is measured by finding the values (in USD) of a basket of consumer goods that are present in each country (such as orange juice, pencils, etc). If that basket costs $100 in the US and $200 in England, than purchasing power parity exchange rate is 1:2.

Differences

What sets GDP (PPP) apart from other economic indicators, such as GDP per capita, nominal GDP, and real GDP, is that GDP (PPP) takes the costs of living into account. This explains why GDP (PPP) is used to measure the quality of life in a country. However, when measuring a country's economic power (i.e. what it can buy on the world market) use GDP at exchange rate.

Examples

For example, suppose that Japan has a higher GDP per capita, ($18) than the US ($16). That means that Japanese on average make $2 more than normal Americans. However, they are not necessarily richer. Suppose that one gallon of orange juice costs $6 in Japan and only $2 in the US. The Japanese can only buy 3 gallons while the Americans can buy 8 gallons. Therefore, in terms of orange juice, the Americans are richer. The US has a GDP (PPP) of $14 while Japan has a GDP (PPP) of $12. The GDP exchange rate is 14:12 or 7:6.

Daily life

Now apply this to daily life. The orange juice represents the previously mentioned "basket of goods" which represents the cost of living in a country. Therefore, even if a country has a higher GDP per capita (individual income), that country's people may still live poorer if the cost of living is more expensive.


Citable sentences

Up to date as of December 20, 2010

Here are sentences from other pages on Purchasing power parity, which are similar to those in the above article.








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