I
don't know anything myself about the way the PPP is constructed or the
neoclassical assumptions that Paul proposed were used. Intuitively,
though, it makes real sense to select the PPP measure (ie., something
that takes into account prices) over one using market exchange rates.
Eg., according to the dollar/cuban peso market exchange rate, we might
conclude that Cubans live on the equivalent of $20 USD per month. Anyone
think that tells us very much about the Cuban standard of living?
michael
PPP comparisons
by
sam pawlett
05 August 2004 14:54 UTC
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Take a simple example of Japan and the US. Say the market
exchange rate
- is 110 Yens = One US$. Now take an equivalent basket--in quantity
and
- quality--that contains a burger with fries and a drink. It costs
450
- Yens in Tokyo and US$ 2.50 in New York. The PPP exchange rate is
then
- 180 Yens = One US$ (450/2.50). There is nothing imaginary about the
PPP
- exchange rate since it gives you the purchasing power of a
country's
- currency vis-a-vis the US dollar.
One thing I've never understood about PPP, is it an attempt to
measure
-what it is like living in a poor country- or is the idea more modest
as
the above paragraph suggests trying to demonstrate what the
market
equivalent amount of currency buys in a given country? For example the
PPP GDP or GNP per capita of a country is $US 500. Does this mean that
living in that country on that given amount of money is like living in
the USA on the same amount of money?
PPP (and the averaging and aggregating that goes on) can be
misleading.A string sampling bias exists. There are no price
differences
between countries in goods and services that are offered by MNC's. The
costs of Mcdonalds,Bechtel water, Enron nat. gas, or a Blockbuster
video
is the same across geographical space with very limited differential.
The IMF and its coat-tailers always (and ,yes, still) say that the most
important economic fundamental is getting prices right. The right price
or international market price always seems to be what the good or
service costs in the USA. How could it be otherwise, inflation always
exists and the bulk of demand for the goods and services offered
by
MNC's is still in the North hemisphere. Ultimately, the WTO project
gets
more goods and services to cost what they cost in the USA and
Europe.
And as that happens, people's access to those goods and services
becomes
more limited, Bechtel water in South Africa for example.
The products offered by local or import substituting businesses
cost
much less. The marlboro, pizza hut or coca-cola knockoff costs %25 as
much. The more foreign based products it counts in its basket of goods,
the bigger the PPP number will be. As the world becomes globalized
and
the stricter that gov'ts enforce WTO rules, the Atlas rather than ppp
will come closer to the truth especially with imports and exports being
priced in US dollars and the ongoing dollarization of world economies.
I
don't think this is an unimportant quibble, as it represents trends
sometimes called combined and uneven development.
Sam Pawlett
Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6
Currently based in Venezuela. Can be reached at
Residencias Anauco Suites
Departamento 601
Parque Central, Zona Postal 1010, Oficina 1
Caracas, Venezuela
(58-212) 573-4111
fax: (58-212) 573-7724
