Download Comparisons between regions

Purchasing power parities
ADB ring workshop
27 June 2006
Paul McCarthy, Prices Branch ABS
1
Spatial price index example
• PPP for USA is 1.00
• PPP for Australia is 1.33
• This means that for every $US1.00
spent in the United States, $A1.33
needs to be spent in Australia to obtain
the same quantity and quality of goods
2
The “Big Mac” index
• If a Big Mac costs P75 in Manila and
$US3.00 in NY then the PPP for a Big Mac
between Manila and NY is P75 to $US3.00
or P25 to $US1.00
• Therefore, for every $1.00 spent on Big
Macs in NY, P25 would have to be spent in
Manila to obtain the same volume of Big
Macs
3
The “Big Mac” index (continued)
• The volume of Big Macs purchased in
Manila can be compared with the volume
purchased in NY by converting
expenditure on Big Macs in Manila to
pesos by dividing by 25.0
• The volume of GDP in the Philippines can
be compared with the volume of GDP in
the USA by converting the GDP in the
Philippines to $US by dividing it by 25
4
The “Big Mac” index (continued)
• The current exchange rate between the
Philippines and the USA is $1.00 = P50
• This difference between the exchange
rate and the PPPs is why we are
calculating PPPs
5
PPPs versus exchange rates
• Price identical products in countries
• If petrol costs $A1.40 in Australia and
€1.50 in France, then the PPP for petrol
between Australia and France is
1.40/1.50 = 0.93
• This means that, for every €1.00 spent
on petrol in France, we would have to
spend $A0.93 in Australia to obtain the
same volume (quantity/quality) of petrol
6
PPPs versus exchange rates (cont)
• Alternatively, for every $A1.00 spent
on petrol in Australia we would have to
spend €1.07 in France to obtain the
same volume even though the exchange
rate is $A1.00 = €0.60
• Implies petrol is almost twice as
“expensive” in France as in Australia
7
PLIs (or CPLs)
• Price level indexes (also called
comparative price levels) measure the
extent to which countries are “cheap”
or expensive
• PLIs are the ratio of PPPs to exchange
rates
• On a base of 100, those countries with
PLIs are cheap while those over 100 are
expensive
8
2002 GDP/capita ($US)
XR based
PPP based
Australia
20,260
25,276
Canada
23,172
26,807
USA
36,202
32,798
Japan
31,173
24,648
37,629
29,449
Russia
2,392
7,327
Korea
11,481
16,709
Switzerland
9
2002 GDP/capita (OECD = 100)
XR based
PPP based
88
110
Canada
100
116
USA
157
142
Japan
135
107
Switzerland
163
128
Russia
10
32
Korea
50
72
Australia
10
2002 PLIs (OECD = 100)
Australia
80
Canada
86
USA
110
Japan
128
Switzerland
126
Russia
33
Korea
69
11
GDP - Japan vs USA (%)
1985 1990 1993 1996 1999
Converted using:
Exchange rates
33
52
67
60
49
PPPs
35
39
40
40
34
Average annual growth in GDP volumes (%)
1985-99 1985-90 1990-93 1993-96 1996-99
Japan
2.6
4.9
1.5
2.0
0.4
USA
3.2
3.2
1.7
3.5
4.3
12
GDP - Japan vs USA (%)
Exchange rates
PPPs
Percent
70
60
50
40
30
1985
1990
1993
1996
1999
Year
13
Exchange rates versus PPPs
• Exchange rates do not reflect the
relative prices of all goods and services in
different countries
– many goods and services (e.g. buildings and
government services) are not traded between
countries
14
Exchange rates versus PPPs (cont)
• Exchange rates are affected by the
relative prices of internationally traded
goods and services, financial flows, and
interest rates
• Exchange rates do not adequately reflect
the relative overall purchasing power of
currencies in their national markets
15
Exchange rates versus PPPs (cont))
• Exchange rates vary from day to day
and sometimes change abruptly
– using exchange rate based comparisons can
result in countries appearing to have
suddenly become "richer" or "poorer" even
when there has been no change in the
actual levels of activity
16
Exchange rates versus PPPs (cont))
• PPPs complement exchange rates
• Exchange rates are preferred to PPPs
for certain applications
– for example, to calculate how much could
be imported with the proceeds from a
particular level of exports
17
Uses: PPPs vs exchange rates
PPPs
• Comparing levels of
output or income
• Comparing levels of
productivity
• Post adjustments
(when being paid in
the local currency)
Exchange rates
• Assessing amount of
imports able to be
purchased from
export revenues
• Calculating the costs
(in your own
currency) of
purchasing goods and
services abroad
18