Similar to the "Big Mac Index, the "KFC Index measures PPP amongst African countries, created by Sagaci Research (a "market research firm focusing solely on "Africa). Instead of comparing a "Big Mac, this index compares a "KFC Original 12/15 pc. bucket.
For example, the average price of KFC´s Original 12 pc. Bucket in America in January 2016 was $20.50; in Namibia it was only $13.40 at market exchange rates. Therefore, the index states the Namibian dollar was undervalued by 33% at that time.
OECD comparative price levels
Each month, the "Organisation for Economic Co-operation and Development measures the difference in price levels between its member countries by calculating the ratios of PPPs for "private final consumption expenditure to exchange rates. The OECD table below indicates the number of US dollars needed in each of the countries listed to buy the same representative basket of consumer goods and services that would cost 100 USD in the United States
According to the table, an American living or travelling in Switzerland on an income denominated in US dollars would find that country to be the most expensive of the group, having to spend 62% more US dollars to maintain a standard of living comparable to the USA in terms of "consumption.
|Country||Price level (USA = 100)|
In addition to methodological issues presented by the selection of a basket of goods, PPP estimates can also vary based on the statistical capacity of participating countries. The "International Comparison Program, which PPP estimates are based on, require the disaggregation of national accounts into production, expenditure or (in some cases) income, and not all participating countries routinely disaggregate their data into such categories.
Some aspects of PPP comparison are theoretically impossible or unclear. For example, there is no basis for comparison between the Ethiopian laborer who lives on teff with the Thai laborer who lives on rice, because teff is not commercially available in Thailand and rice is not in Ethiopia, so the price of rice in Ethiopia or teff in Thailand cannot be determined. As a general rule, the more similar the price structure between countries, the more valid the PPP comparison.
PPP levels will also vary based on the formula used to calculate price matrices. Different possible formulas include GEKS-Fisher, Geary-Khamis, IDB, and the superlative method. Each has advantages and disadvantages.
Linking regions presents another methodological difficulty. In the 2005 ICP round, regions were compared by using a list of some 1,000 identical items for which a price could be found for 18 countries, selected so that at least two countries would be in each region. While this was superior to earlier "bridging" methods, which do not fully take into account differing quality between goods, it may serve to overstate the PPP basis of poorer countries, because the price indexing on which PPP is based will assign to poorer countries the greater weight of goods consumed in greater shares in richer countries.
Need for adjustments to GDP
The exchange rate reflects transaction values for "traded goods between countries in contrast to non-traded goods, that is, goods produced for home-country use. Also, currencies are traded for purposes other than trade in goods and services, e.g., to buy "capital assets whose prices vary more than those of physical goods. Also, different "interest rates, "speculation, "hedging or interventions by "central banks can influence the "foreign-exchange market.
The PPP method is used as an alternative to correct for possible statistical bias. The "Penn World Table is a widely cited source of PPP adjustments, and the associated "Penn effect reflects such a "systematic bias in using exchange rates to outputs among countries.
For example, if the value of the "Mexican peso falls by half compared to the "US dollar, the Mexican "Gross Domestic Product measured in dollars will also halve. However, this exchange rate results from international trade and financial markets. It does not necessarily mean that Mexicans are poorer by a half; if incomes and prices measured in pesos stay the same, they will be no worse off assuming that imported goods are not essential to the quality of life of individuals. Measuring income in different countries using PPP exchange rates helps to avoid this problem.
PPP exchange rates are especially useful when official exchange rates are artificially manipulated by governments. Countries with strong government control of the economy sometimes enforce official exchange rates that make their own currency artificially strong. By contrast, the currency's black market exchange rate is artificially weak. In such cases, a PPP exchange rate is likely the most realistic basis for economic comparison. Similarly, when exchange rates deviate significantly from their long term equilibrium due to speculative attacks or carry trade, a PPP exchange rate offers a better alternative for comparison.
Extrapolating PPP rates
Since global PPP estimates —such as those provided by the ICP— are not calculated annually, but for a single year, PPP exchange rates for years other than the benchmark year need to be extrapolated. One way of doing this is by using the country's "GDP deflator. To calculate a country's PPP exchange rate in Geary–Khamis dollars for a particular year, the calculation proceeds in the following manner:
Where PPPrateX,i is the PPP exchange rate of country X for year i, PPPrateX,b is the PPP exchange rate of country X for the benchmark year, PPPrateU,b is the PPP exchange rate of the "United States (US) for the benchmark year (equal to 1), GDPdefX,i is the GDP deflator of country X for year i, GDPdefX,b is the GDP deflator of country X for the benchmark year, GDPdefU,i is the GDP deflator of the US for year i, and GDPdefU,b is the GDP deflator of the US for the benchmark year.
There are a number of reasons that different measures do not perfectly reflect standards of living.
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 further 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.
PPP calculations tend to overemphasise the primary sectoral contribution, and underemphasise the industrial and service sectoral contributions to the economy of a nation.
Trade barriers and nontradables
The law of one price, the underlying mechanism behind PPP, is weakened by transport costs and governmental trade restrictions, which make it expensive to move goods between markets located in different countries. Transport costs sever the link between exchange rates and the prices of goods implied by the law of one price. As transport costs increase, the larger the range of exchange rate fluctuations. The same is true for official trade restrictions because the customs fees affect importers' profits in the same way as shipping fees. According to Krugman and Obstfeld, "Either type of trade impediment weakens the basis of PPP by allowing the purchasing power of a given currency to differ more widely from country to country." They cite the example that a dollar in London should purchase the same goods as a dollar in Chicago, which is certainly not the case.
Nontradables are primarily services and the output of the construction industry. Nontradables also lead to deviations in PPP because the prices of nontradables are not linked internationally. The prices are determined by domestic supply and demand, and shifts in those curves lead to changes in the market basket of some goods relative to the foreign price of the same basket. If the prices of nontradables rise, the purchasing power of any given currency will fall in that country.
Departures from free competition
Linkages between national price levels are also weakened when trade barriers and imperfectly competitive market structures occur together. Pricing to market occurs when a firm sells the same product for different prices in different markets. This is a reflection of inter-country differences in conditions on both the demand side (e.g., virtually no demand for pork in Islamic states) and the supply side (e.g., whether the existing market for a prospective entrant's product features few suppliers or instead is already near-saturated). According to Krugman and Obstfeld, this occurrence of product differentiation and segmented markets results in violations of the law of one price and absolute PPP. Over time, shifts in market structure and demand will occur, which may invalidate relative PPP.
Differences in price level measurement
Measurement of price levels differ from country to country. Inflation data from different countries are based on different commodity baskets; therefore, exchange rate changes do not offset official measures of inflation differences. Because it makes predictions about price changes rather than price levels, relative PPP is still a useful concept. However, change in the relative prices of basket components can cause relative PPP to fail tests that are based on official price indexes.
Global poverty line
The global poverty line is a worldwide count of people who live below an international "poverty line, referred to as the dollar-a-day line. This line represents an average of the national poverty lines of the "world's poorest countries, expressed in international dollars. These national poverty lines are converted to international currency and the global line is converted back to local currency using the PPP exchange rates from the ICP. PPP exchange rates include data from the sales of high end none poverty related items which skews the value of food items and necessary goods which is 70 percent of poor peoples' consumption. Angus Deaton argues that PPP indexes need to be reweighted for use in poverty measurement; they need to be redefined to reflect local poverty measures, not global measures, weighing local food items and excluding luxury items that are not prevalent or are not of equal value in all localities.
- "List of countries by GDP (PPP)
- "List of countries by GDP (PPP) per capita
- "List of IMF ranked countries by GDP, Includes IMF ranked PPP of 186 countries
- "Measures of national income and output
- "Relative purchasing power parity
- Cassel, Gustav (December 1918). "Abnormal Deviations in International Exchanges". 28, No. 112 (112). The Economic Journal: 413–415. "JSTOR 2223329.
- Cheung, Yin-Wong (2009). "purchasing power parity". In Reinert, Kenneth A.; Rajan, Ramkishen S.; Glass, Amy Jocelyn; et al. The Princeton Encyclopedia of the World Economy. I. Princeton: Princeton University Press. p. 942. "ISBN "978-0-691-12812-2. Retrieved 2 October 2011.
- Krugman and Obstfeld (2009). International Economics. Pearson Education, Inc.
- Daneshkhu, Scheherazade (18 December 2007). "China, India economies '40% smaller'". Financial Times.
- 2005 World Development Indicators: Table 5.7 | Relative prices and exchange rates
- "List of countries by past and future GDP (nominal)
- "List of countries by future GDP (PPP) per capita estimates
- "CNN/Money: Global gas prices".
- Krugman and Obstfeld (2009). International Economics. Pearson Education, Inc. pp. 394–395.
- Narasimhan, Anand; Dogra, Aparna (3 September 2012). "The case study: Goli Vada Pav". Financial Times. Retrieved 30 April 2014.
- "Interactive currency-comparison tool". The Economist.
- Glenda Kwek. "Is the Aussie too expensive? iPad index says no". The Age.
- 23rd Sep 2013, CommSec Economic Insight: CommSec iPad Index
-  "Commonwealth Securities 23 September 2013
- Liz Tay (September 23, 2013). "Here's How Much An iPad Costs In 46 Countries". Business Insider Australia.
- as of 14 Apr 2015 "Monthly comparative price levels". OECD. 14 April 2015.
- Paul Schreyer and Francette Koechlin (March 2002). "Purchasing power parities – measurement and uses" (PDF). Statistics Brief. OECD (3).
- Paul McCarthy. "Chapter 18: Extrapolating PPPs and Comparing ICP Benchmark Results" (PDF). "International Comparison Program. "World Bank. p. 29.
- Thomas Pogge on Global Poverty
- Price indexes, inequality, and the measurement of world poverty Angus Deaton, Princeton University
- Penn World Table
- Purchasing power parities updated by Organisation of Cooperation and Development (OECD) from OECD data
- Explanations from the U. of British Columbia (also provides daily updated PPP charts)
- Purchasing power parities as example of international statistical cooperation from Eurostat - Statistics Explained
- World Bank International Comparison Project provides PPP estimates for a large number of countries
- UBS's "Prices and Earnings" Report 2006 Good report on purchasing power containing a Big Mac index as well as for staples such as bread and rice for 71 world cities.
- "Understanding PPPs and PPP based national accounts" provides an overview of methodological issues in calculating PPP and in designing the ICP under which the main PPP tables (Maddison, Penn World Tables, and World Bank WDI) are based.
- * List of Countries by Purchasing Power Parity since 1990 ("World Bank)