Talk:Purchasing power parity

" Get out of the box "

purchasing power parity (PPP) the cause for differences is due wages and not exchange rates. Good article on this subject is http://henryckliu.com/page54.html

"Major rewrite"

I've just done a major rewrite. The new version clarifies what the PPP method is, what it's used for and why, and what issues it has. I also removed all references to a PPP "theory." PPP is a method, not a theory. I know of no theory saying that "in equilibrium, the exchange rate that will prevail between two countries will be that which equalizes the prices of traded goods in each country." The whole point of using PPP is that using real exchange rates, goods won't cost the same amount in different countries. Isomorphic 01:46, 10 Jun 2004 (UTC)
- Because of so called arbitrage some prices strive towards a common price. For example prices for precious metals like gold doesn't range widely across borders. Gold ([1]) cost $420 US dolllars per troy ounce in most parts of the world. If it sold for $200 bucks per ounce in Canada or even China it would sell out pretty quick. While things like a Big Mac is not as easily arbitraged across wide distances.

?

The article states "If a Big Mac costs USD$4 in the US and GBP£3 in Britain, the PPP exchange rate would be £3 for $4." and "while in the US, GDP per capita was about $27,500 and the PPP was $36,000". So if the PPP burger cost $4 in the states, how much does the burger cost in the dollar for dollar currency market? Can you even trade US dollars for US dollars? Please clarify this.
Do not be confused by for example the IMF numbers that show a disparity between US PPP and Nominal numbers ([2]), it's simply because of different GDP base numbers, the USD to USD PPP and Market exchange rates is of course alwys 1.0. Thanks - Jerryseinfeld 00:00, 11 Oct 2004 (UTC)
- Since no one else would correct the errors, I wrote a "clarification". - Thanks - Jerryseinfeld 13:08, 28 Oct 2004 (UTC)

Nominal vs. PPP

In terms of a countries economic size/capacity, nominal GDP is a much more accurate look at the economic power of a country. Seriously just the thought of China having a GDP 3/4 the size of the US economy in terms of PPP is just preposterous! Look at the Fortune global 2000 list of the largest most powerful companies in the world. The US has almost 700(!!!) of the Fortune's 2000 companies (which are 20 times the size of the Chinese counterparts) while China has all but 50! Please can someone just admit that nominal is much more realistic in terms of economic size/capacity. I'm gonna be fair and say that PPP is more of a standard of living indicator and mostly theoretical... Last I thought Bangladesh wasn't larger than Switzerland in economic size. Through PPP it's saying that a poor country with low enough prices equals a much larger GDP? I think in the future economists will perfect or at least come close to more accurately portraying the size of a country's economy. I remember just a few years back nominal was the default statistic and now recently PPP has come a lot more into favor. Can I please get follow up, thanks.

I don't get...

this:

"It takes into account that some goods like real estate, services (e.g. medical services) and heavy items are non-traded, and thus not reflected in the exchange rate."

Why should this affect PPP?

The basic idea is that traded goods (think iPods) have a similar price everywhere. Nontraded goods do not: you might get a haircut for 50 cents in some countries; you might as well buy a mansion for a few thousand Dollars, if labour costs and real estate is cheap enough. Your x-thousand Dollars might buy that much more goods and services in that other country.

Secondly, maybe a nice easy definition should happen above the ToC, like "The PPP measures better how much an individual can buy in terms of an international measure (usually dollars), since goods and services in some countries have different prices than others. It is often considered a better measure of standard of living than just national income." Okay it's similar to the definition, but I found it quite technical if someone just looks up what 'PPP' means. --Mark Lewis 20:14, 3 Feb 2005 (UTC)

I just rewrote the intro, using some of what you wrote. I'm trying to keep it clear that PPP is, fundamentally, a way of comparing two currencies. Its purpose is, as far as I know, always to compare GDP or per capita GDP, but that's not what it is. OK, I'm pedantic ;-) Anyway, the truth is that the article needs a lot of rewriting. Parts of it are overly technical or poorly explained, and I'm not even sure that some parts are correct. Unfortunately, my knowledge of the subject is a bit weak. I listed it on Wikipedia:The Business and Economics Forum as needing attention; hopefully someone can fix it eventually. Isomorphic 22:41, 3 Feb 2005 (UTC)

Thanks for such a rapid reply, and I think the intro now provides a nice easy quick reference for someone simply looking for a non-technical definition. --Mark Lewis 17:53, 4 Feb 2005 (UTC)

More on the intro: This sentence is confusing: "...the purchasing power parity hypothesis suggests that the long run equilibrium value is that which yields purchasing power parity." Is what you mean to say the same as this sentence: "It asserts that exchange rates are in equilibrium when the domestic purchasing power of currencies are the same." That sentence I get. It can be found here: http://www.economyprofessor.com/economictheories/purchasing-power-parity.php. Cellulator 17:42, 28 March 2006 (UTC)[reply]

VOTE!! - HDI in country infobox/template?

The Human Development Index (HDI) is a standard UN measure/rank of how developed a country is or is not. It is a composite index based on GDP per capita (PPP), literacy, life expectancy, and school enrollment. However, as it is a composite index/rank, some may challenge its usefulness or applicability as information.

Thus, the following question is put to a vote:

Should any, some, or all of the following be included in the Wikipedia country infobox/template:

(1) Human Development Index (HDI) for applicable countries, with year;

(2) Rank of country’s HDI;

(3) Category of country’s HDI (high, medium, or low)?

YES / NO / UNDECIDED/ABSTAIN - vote here

Thanks!

E Pluribus Anthony 01:52, 20 September 2005 (UTC)[reply]

"big mac" ?

Just a question out of curiosity: how does the Economist justify its choice of the big mac as an index? Surely the big mac is a luxury good in some countries and a cheap one in others? Doops | talk 05:43, 2 October 2005 (UTC)[reply]

As far as I'm aware, it's because it is a highly-standardised good readily available in most countries.

"Invented in 1986 as a light-hearted guide to whether currencies are at their “correct” level, our “basket” is a McDonalds' Big Mac, which is produced locally in almost 120 countries.

The Big Mac index was never intended as a precise forecasting tool. Burgers are not traded across borders as the PPP theory demands; prices are distorted by differences in the cost of non-tradable goods and services, such as rents.

Yet these very failings make the Big Mac index useful, since looked at another way it can help to measure countries' differing costs of living. That a Big Mac is cheap in China does not in fact prove that the yuan is being held massively below its fair value, as many American politicians claim. It is quite natural for average prices to be lower in poorer countries and therefore for their currencies to appear cheap." The Economist [3]

"Explanation"

The "Explanation" section of this article doesn't explain anything. It starts with the word "Thus," which suggests that there ought to be some introduction that leads to the conclusions contained in the paragraph. Without the introduction, the conclusion is meaningless. --Russ Blau (talk) 12:30, 2 October 2005 (UTC)[reply]

Request to editors of this page: Please explain this equation so that a layperson with little economic background can comprehend. Explanation of variables used would assist in this goal.

S = P$ / P£ ($/£) etc.

I feel that using the PPP method is highly misleading

I do not understand why wikipedia use the PPP method as default when displaying GDP per capita for countries, but not showing the real statistics. This is highly misleading, you will see $5642 GDP per capita for China using the PPP method, but the real GDP per capita is $1290.

However you compute it GDP is a complex statistical artifact. There is no 'true' GDP number, only alternative ways of estimating the level of economic activity. For purposes of comparing living standards, PPP is generally better. JQ 22:06, 5 February 2006 (UTC)[reply]

Currency Pegs

While I realize that this may be overly technical for most of the audience, one of the critical factors in understanding differences, especially for china, is the currency peg placed between the chinese and american currencies.

If the currencies were allowed to float (if free markets were allowed to correct imbalances), the chinese currency would be stronger. By extention, the real GDP of China would be considerably higher then the $1290.

This reality not only helps explain the benefit of PPP in inefficient currency markets, but also would be important to help assuage confusions like the above post.

Merger

Shouldn't there be a merger with Purchasing price parity? They seem to be the same thing to me. Purchasing POWER parity, also gets more hits on google. 71.250.1.198 15:04, 20 May 2006 (UTC)[reply]

PPP Has Serious Flaws And Is Highly Misleading

This article needs to make it clear that: "GDP (nominal) per capita" is based on one thing and one thing only: the world currency markets. The value that markets assign to various currencies is the ONLY real-world value that currencies have. Thus GDP (nominal) per capita is the ONLY definitive way to compare national economies. The PPP method, which has increasingly gained favor in recent years, is highly flawed and is based on obscure methodology that (absurdly) ranks items like McDonald's "Big Mac" hamburgers (even though the latter is far more of a "staple" of daily living in a place like the U.S., than somewhere like, say, Taiwan or Bolivia). Meanwhile, the basic staples of daily life in a place like, say, Japan, are not even factored into the PPP valuations. The U.S. media is very strongly misleading its readers when it relies solely on PPP numbers (and fails to inform its readership exactly what PPP is based on). There are some (flimsy) arguments for the use of PPP, but by and large it is a highly flawed methodology that really needs to be scrapped entirely. It's foolish to rely on anything other than the marketplace to determine the true value of a given currency.

Calling PPP an "obscure methodology" is absurd. It's actually a fairly simple method that attempts to correct for fact that goods are priced differently in different countries. You could also think of PPP as a way to correct for the fact that market value of currencies is determined only by international trade, ignoring the rest of a country's economy. Is PPP perfect? Of course not. Is it better for some purposes than using market value? Definitely. Isomorphic 03:17, 1 June 2006 (UTC)[reply]