What is Purchasing Power Parity?

Discussion in 'Economy & Infrastructure' started by trackwhack, Nov 3, 2011.

  1. trackwhack

    trackwhack Tihar Jail Banned

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    I'd like a general opinion from anyone who is interested, especially from people with an economic background. It started when a good friend stated this

    PPP is a term developed by some economists to make developing nations feel confident and use better their domestic abilities.

    I have a completely different view though, but would be glad to stand corrected as long as it enhances my wisdom.
     
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  3. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    will like to hear your view, though it is certainly not about making some country confident. anyways, what was the detailed argument put up by your friend.
     
  4. trackwhack

    trackwhack Tihar Jail Banned

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  5. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    Picking from the discussion, I haven’t read the whole discussion.

    In nominal gdp terms the US, India mismatch will be undone in 30-35 odd years from today, at least that is what the predictions are.

    As the things are panned out today, we could do it a lot earlier since we have been doing a lot better than predicted and the US on the other hand is doing a lot bad, but then with the political leadership we have and future being uncertain, that it is, nothing for sure can be said.

    While calculating nominal gdp three factors are important:
    Real growth rate.
    Inflation rate.
    Exchange rate.

    While calculating indian gdp figures, please keep in mind the real growth rate to be between 7-9%, over an extended period of time the same ideally be taken as 7%, inflation at around 5-7%, and exchange rate will have to come down in 30s, if not less, since indian currency is already a lot more devalued than it should be and is bound to appreciate in the long run which will positively reflect on nominal gdp.

    For the year 2020 recent revised predictions for India have been 4-5t usd (nominal gdp), which is what I like to go with, but then mukesh ambani has put the figure at 9t usd. That said, India has recently doubled gdp in last 4 years (2006-2010), and if that is what the trend remains, then by 2020 the nominal gdp could be closer to what mukesh ambani is suggesting, though the rider comes in the form of inflation, which as you would agree isn’t a good thing.

    Nominal gdp growth rate last fiscal was somewhere around 20(+)% and not 9%, don’t have the exact figure.

    Purchasing par parity was devised to get a hang of purchasing power of a currency in different economies, and how do they equate.

    A dollar in US buys a lot less than it does in India. The difference in US dollar terms is to the tune of 2.7-2.8 times, which means in India the same dollar bill will buy 2.7-2.8 times to what it will buy in the US.

    The equalizing factor is 2.7-2.8 times, which is when US dollar purchasing power parity gets drawn but in the long run this factor will only reduce, which mean a US dollar purchasing power will reduce in India.
     
  6. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    PPP is good for examining the local GDP but it is pretty worthless trying to compare advanced economies to underdeveloped economies. It doesn't take into account quality of goods and services in its comparison. That is why economists use nominal GDP that actually measures the value of the economy.
     
  7. trackwhack

    trackwhack Tihar Jail Banned

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    PPP as I interpret it is what broadly defines the cost of living. Nominal GDP is supposed to on the other hand mmeasure absolute productivity. The problem with nominal GDP (and the reason why PPP exists) is that goods and services do not cost the same in different economies.
    A front desk exec in a Candlewood Suites here in the SU makes $1600 a month. A front desk exec in an equivalent hotel in Bombay makes $200 a month. But wait before we make any judgements, The $1600 counts as fair contribution to the US GDP and the $200 counts as fair contribution to the Indian GDP. Both do the exact same thing, same skills and everything. But yeah the American front desk exec makes 8 times as much because.... the service he provides is eight times better? Not really is it? But lets park that.

    Now lets look at it a little differently - An Indian earning $1600 a month in Bombay is at the very least a junior doctor or a programmer or a white collar exec in a well to do firm. So the value of an Indian Doc or white collar exec is the same as an American front office bell boy?

    Now lets look at it in yet another way. If you thought the front desk exec making $1600 in the US is having a ball of a life think again. In a city like NY, the poor chap wont even make the rent on a one bedroom apartment with HVAC. Whereas the guy making $1600 a month in Bombay is living the good life the last I checked.

    I can only deduce that it made very good sense for the Americans to kill the gold standard and replace it with the Dollar standard. It also makes very good sense for spend more on maintaining a military that is bigger than the cumulative strength of the rest of the world to protect the dollar. Just the small matter of a 14 trillion and growing defecit, more than half of which is owed to other nations. It will be interesting to see how they pay it off. What happenning in Europe is just the trailer. :)
     
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  8. ashdoc

    ashdoc Senior Member Senior Member

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    its more like a ' third world balm ' meant to make us feel less poorer than we actually are--because it makes our economy appear larger than it actually is .

    like most politically correct things , its mostly crap .
     
  9. Bangalorean

    Bangalorean Stars and Ambassadors Stars and Ambassadors

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    PPP is sensible while speaking of domestic economy, for example, while talking of per capita income measured in dollars. Nominal figures are best used to compare different nations. Comparing nations on the basis of PPP is highly flawed.

    That claim that "PPP is a term developed by some economists to make developing nations feel good" is such bullshit though!!! PPP is relevant, and extremely important, when we talk of manufacturing or services outsourcing.

    And one more piece of information that needs to be corrected based on what I read on that other thread. The growth figures for India already take inflation into account. No need to do any 9% -5% :crazy: Inflation has already been accounted for, and real growth is what gets reported at the end.
     
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  10. Bangalorean

    Bangalorean Stars and Ambassadors Stars and Ambassadors

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    Ashdoc, nonsense. "Third world balm" indeed!!!

    Have you been outside India? What is the cost of daily essentials, food, etc. in countries in West Europe and the USA? What is it in India? In absolute dollar terms, will you get the same amount of goods/services in US and India for 10 dollars?
     
  11. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    on nominal gdp two things i forgot to mention.

    • the accounting methods are such that a near 50(+)% of the economy goes unaccounted for, over and above the present.
    • india's parallel economy, which sustains the economy, is at least worth 50%.
    india's nominal economy just by including those two factors was worth at least 3.5 t usd on the 31st march, '11, but getting in the parallel economy is a big challenge, but then accounting is most likely to be corrected and we will see a jack up of 50% and if that was to be done today, we can safely assume indian nominal gdp to be 2.6t usd, right next to france and ppp gdp to be around 7t usd, way-way past japan.

    it is but obvious that someone earning $1600pm in india would have a much better life style than someone doing the same in the US, but there are certain disadvantages, which are the governments' (both center and state) way of earning revenue by heavily taxing a product in india, something that doesnt get done is the US.

    you go to buy a car, lets say a c class merc, in the US the same model costs around 14 lacks, in india because the governments so heavily taxes the same product, the cost of the same vehicle becomes 30lacks. the moot question is, what is it that one is bargaining for. if its nutrition, health, things which are of basic need, then yes, all those things are definitely more affordable, but if one is looking out for stuff that is tagged as luxury, we in india are being taken for a big ride, not only that, we are being cheated and robbed quite literally.

    other than that, as i suggested the factor to be 2.7-2.8 times, which from individual case can vary from 10times as an advantage in india to negative 2-3 times at least.
     
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  12. pmaitra

    pmaitra Moderator Moderator

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    Just quoting for convenience:
     
  13. ace009

    ace009 Freakin' Fighter fan Elite Member

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    Hold on - don't make sweeping claims like that - you know that to reach per capita income levels of $20,000 a year by 2030 (from the current $1475) India has to grow at the rate of 9.5% year by year EVERY year till 2040 or at the rate of 15% year by year EVERY year till 2030.

    A more reasonable amount is a growth rate of 8% - which means by 2030 India's per capita GDP will be - $6335 and by 2040 it will be $2040.

    If you meant PPP, then remember that GDP-per capita PPP changes a LOT more depending upon the purchasing power parity and is very difficult to predict.
     
  14. ace009

    ace009 Freakin' Fighter fan Elite Member

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    I am not sure you understand the concepts of PPP and purchasing power - do you? read up ...

    Purchasing power parity - Wikipedia, the free encyclopedia

    especially this part ...

    Range and quality of goods
    The goods that the currency has the "power" to purchase are a basket of goods of different types:
    Local, non-tradable goods and services (like electric power) that are produced and sold domestically.
    Tradable goods such as non-perishable commodities that can be sold on the international market (like diamonds).
    The more that a product falls into category 1, the more that its price will be from the currency exchange rate, moving towards the PPP exchange rate. Conversely, category 2 products tend to trade close to the currency exchange rate. (See also Penn effect).
    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. Even if the PPP "value" of the Ethiopian currency is three times stronger than the currency exchange rate, it won't buy three times as much of internationally traded goods like steel, cars and microchips, but non-traded goods like housing, services ("haircuts"), and domestically produced crops. 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 Ethiopia), as against high income countries (like Switzerland).
    The corporate cost advantage is nothing more sophisticated than access to cheaper workers, but because the pay of those workers goes farther in low-income countries than high, the relative pay differentials (inter-country) can be sustained for longer than would be the case otherwise. (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.) 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). These act as a cheaper factor of production than is available to factories in richer countries.
    The Bhagwati-Kravis-Lipsey view provides a somewhat different explanation from the Balassa-Samuelson theory. This view states that price levels for nontradables are lower in poorer countries because of differences in endowment of labor and capital, not because of lower levels of productivity. Poor countries have more labor relative to capital, so marginal productivity of labor is greater in rich countries than in poor countries. Nontradables tend to be labor-intensive; therefore, because labor is less expensive in poor countries and is used mostly for nontradables, nontradables are cheaper in poor countries. Wages are high in rich countries, so nontradables are relatively more expensive.[3]
    PPP calculations tend to overemphasise the primary sectoral contribution, and underemphasise the industrial and service sectoral contributions to the economy of a nation.
     
  15. trackwhack

    trackwhack Tihar Jail Banned

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    Here we go again, economics lessons. I am not getting into another spat with you but since you highlighted it I will respond by saying a person with a bachelors commerce equivalent degree in the US doing a data entry task gets paid approximately 3K per month. that 3K is productive GDP in the US. the same task performed by a graduate of equal proficiency in India gets paid 200 per month and gets added to nominal GDP as such.

    So there is a bloody good reason for Primary sectors to be overemphasized, but unfortunately I am this dude --> :frusty: <-- and you are this wall
     
  16. KS

    KS Bye bye DFI Veteran Member

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    Where did you get that number ?

    A highly qualified engineer working in a wall street firm takes home at most 6K a month.Just dont pluck out number from thin air to further your point.
     
  17. trackwhack

    trackwhack Tihar Jail Banned

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    The operations staff working in my firm get paid $74K per anum. When budgeting we budget at $110K per anum including overheads and benefits for an L1 employee whose only task is customer service/data entry/validation/proof reading etc. .

    What cost benefit numbers do you think BPO's outsource on? base salary for an onsite employee is taken at 2.5 - 3K in the US in a B grade city and 3.5- 4K per month in a city like NY.

    Such info should be openly available on google. Dont flame if you are unaware of ground realities.

    And btw, highly qualified engineers can mean guys writing source code for mainframes or guys designing composite frames for the next space shuttle. you should be the one that stops generalizing and plucking numbers out of thin air.

    Also there are enough US members here who working in varied industries who can back these numbers if they choose to.
     
    Last edited: Feb 2, 2012
  18. ace009

    ace009 Freakin' Fighter fan Elite Member

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    Track back at whacky again! Cheers karthick - you just stepped in Tracks doo-doo of a brain again!

    Go to Salary.com to look up salaries dude ...
     
  19. trackwhack

    trackwhack Tihar Jail Banned

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    I made a point, respond to it, else TOTAL FAIL. Dont be like Mr Mallu Chettan Jay, and troll/call names.

    I checked and I was spot on. Salary - 35K + 5K bonus + Benefits. This is for a high school diploma guy. Even if you take only base salary of 35K, it is 3K per month.

    Now please respond with something that makes sense and dont troll.
     
    Last edited: Feb 2, 2012
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  20. Godless-Kafir

    Godless-Kafir DFI Buddha Senior Member

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    LMAO of i wonder who is Mallu Chettan Jay! :D
     
  21. KS

    KS Bye bye DFI Veteran Member

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    All these overheads are just exaggerated excuses these bloody firms give to fool the worker after they entice him with attractive salary package in his offer letter.

    What matters is the take home package which is in the range I mentioned.

    And I repeat, the take home salary of a Comm graduate is no where near the 3K figure you mentioned.

    Ground reality ? I am on the ground (in NY) fella and I know what I'm talking about.

    Actually I have lost track of what you are trying to argue for or against. Please stick with the topic.
     
    Last edited: Feb 2, 2012

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