FAQs
What is purchase power parity? How does it help in determining the right price of a product? Answer to all your questions.
What is Purchasing Power Parity?
Let's understand this with an example (if you are interested in the technical definition - Wikipedia is your friend). Assuming there are no transaction costs or trade barriers, according to the law of one price, the price of a good should be the same everywhere. If a computer in the US costs 500 USD and the same costs 3000 HK dollars in Hong Kong, according to PPP theory, the exchange rate should be 4 HK dollars for every US dollar. In practice though, the exchange rate is 1 USD = 7.76 HKD. So, how do you account for the remaining 3.76 HKD? That's where PPP comes into the picture.
PPP helps determine the adjustment required in different currencies' exchange rates to make them at parity for that region or country. In the earlier case, PPP adjusted exchange rate, for this reason, would be 4 HK / USD.
Why do I care
You should care whether you are a consumer or a product maker. As a consumer, by being aware of our country's PPP, you could make sure that you are paying the right price for a product. As a product maker, you will always adjust your price according to the market where you are selling it.
Can you give me an example?
A big mac costs 5.66 USD in the US. The same burger (or a similar one) costs around 2.59 USD in India after converting Indian Rupee to USD. If they sold it at the same price as the US, it would be 2.4x as costly as the US. Imagine, having 12.4 USD big mac. Well, that's how people in weaker currencies feel when the price isn't adjusted for them.
How does Parity List help in all this?
Internet has blurred country boundaries. As a consumer sitting in India, I can buy and consume products made elsewhere. When PPP isn't considered by a company, it becomes difficult to buy and justify the expense. At the same time, the products which consider purchase power parity of a country, it becomes much easier to make a decision. I mostly end-up buying them. Parity List makes it easy to discover such products.