Purchasing power parity

Prices differ across geography. So, in order to compare living standards we fiddle with our unit of currency to try to equate prices. Thus we can compare living standards using our now fiddled currency – that’s purchasing power parity.

An example of prices differing. In Bangladesh right now:

Each cabbage and cauliflower are being sold at Tk15-20, white radish, carrot and brinjal at Tk10-15, Tk15-30 and Tk10-25 per kg respectively.

Fine rice is available at Tk58, medium-quality rice at Tk52 and coarse rice at Tk48.

1Tk is about once pence UK or even, at this level of accuracy, 1 cent US.

50 pence a kilo for rice isn’t far out of the Costco or the like price range. This makes sense, rice is a globally traded item, the law of one price comes into effect. Fungible items will be about the same price, including the costs of transport, across geography. This isn’t because they ought to be but because arbitrage through trade across those geographic price differences will make them so. Brinjal is aubergine/eggplant. That’s not so much an internationally traded item. Ten to twenty pence/cents a kilo is pretty damn cheap.

Which is why we use PPP and also how it is calculated.

10 thoughts on “Purchasing power parity”

  1. Sometimes, you are astonished by the differences. About 30 years ago I was in a German city, waiting for my chums to pick me up in a minibus. I was appalled at the sort of knackered cars I was seeing pass by in the rush hour, compared to the cars I saw on UK streets, everything there was geriatric, smoking and rusty. It was all the more surprising because the evening before I’d gone for a walk round, and the prices in the shops (when things in the windows were priced) weren’t just more than I wanted to pay, but for some mundane items were more that I could perhaps afford. Things like the £17 keyring in a not very upmarket shop.

    But things change. In 1980 I was in Vienna and literally couldn’t afford a small round of drinks. More recently, I thought it was relatively cheap. In Moscow, the same year, I could afford anything, except that there wasn’t any stock!

  2. You inspired me to look up rice at tesco.com and found that the cheapest is Grower Harvest Long Grain Rice 1Kg at 45p. Checking the exchange rate ight now, that is 52 Tk, exactly the price of the quoted “medium quality rice”. Admittedly, most varieties of rice in Tesco are much more expensive (e.g. Tilda Brown Basmati Rice 1Kg at £4.95), but it does show how worldwide trade pushes prices down very low.

  3. Bloke in North Dorset

    Excavator Man,

    It sounds like you were there just after the wall came down. Prior to that most Germans were driving round in fairly new Mercs and the standard of driving was quite high. When I went back in the early ’90s I was appalled at the state of the cars and driving. The autobahns were safeish with good lane discipline, but once those old cars got on them they became a death trap.

  4. I can remember a cycling holiday in the Netherlands. Everything seemed expensive. We got on a train to Luxemburg – problem solved.

  5. @dearieme Funny you should say that.. I remember sojourns into the UK in the Guilder age where going over could be really expensive, depending on the exchange rate.

    We pretty quickly learned to save up and exchange for GBP well in advance when the opportunity knocked, and never ever to ditch the “small change”…

  6. Brinjal is aubergine/eggplant. That’s not so much an internationally traded item. Ten to twenty pence/cents a kilo is pretty damn cheap.

    Rice is easy to transport in bulk and store, carrots rather less so and aubergines bruise easily and have a short shelf-life. Arbitraging aubergines is for the birds.

  7. Bloke in China (Germany province)

    Price of some commodity in hours worked per unit commodity has increased 30% recently. Evil capitalist free-trading market bloodsucking profiteers, government must intervene!

    Price of same commodity in hours worked per unit commodity has fallen to 0.3% of its price compared to [past]. Evil capitalist free-trading market bloodsucking profiteering, er, oh.

  8. Excavator Man, I was in Poland as the Berlin Wall came down, and all the cars where knackered. I got taken around in a Trabant! But everything was dirt cheap, except the western goods that I was involved in importing there which could only be bought with US dollars.

  9. Familiar with the subject of the post from Colombia. Barrio my amiga comes from, you could buy a house for £12,000. Locally grown produce is cheap.But average earnings are paltry. Bag of rice at a shop would be half as much again as Tesco. Verging on a luxury good. Everything works against them. Small turnover retailer at the end of a long supply chain for a world traded commodity.

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