Comments on: Purchasing Power Parity – “for the inebriated masses” http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/ for students and teachers of AP and IB Economics Mon, 15 Mar 2010 22:25:53 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Pia http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7194 Pia Tue, 16 Dec 2008 21:30:13 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7194 I think Joel made a really important point because it is peculiar that the price of beer is on average higher in countries with stable governments as opposed to countries with unstable governments. But I am asking myself, what factors influenced that beer is cheaper in countries with an unstable government? Or is the beer really cheaper? I mean, the countries illustrated on the right of the diagram may have indirect taxes imposed on beer. Thus the beer in those countries might not actually be cheaper than in the countries illustrated on the left of the diagram. Lastly, I don't think that the beer diagram explains the Purchasing Power Parity. I think Joel made a really important point because it is peculiar that the price of beer is on average higher in countries with stable governments as opposed to countries with unstable governments.
But I am asking myself, what factors influenced that beer is cheaper in countries with an unstable government? Or is the beer really cheaper? I mean, the countries illustrated on the right of the diagram may have indirect taxes imposed on beer. Thus the beer in those countries might not actually be cheaper than in the countries illustrated on the left of the diagram.
Lastly, I don’t think that the beer diagram explains the Purchasing Power Parity.

]]> By: Deirdre Stenson http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7187 Deirdre Stenson Tue, 16 Dec 2008 20:07:10 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7187 Although this idea is interesting, does the PPP in theory not concern itself with a variety of different goods that can be easily obtained in a multitude of nations rather than one single product? Moreover, the questions raised by many of the other students I feel would need to be answered before a clear analysis of this index can be made. I do not feel that this chart clearly represents the PPP theory and as Myrthe mentions unless the factors that she has outlined have been taken into consideration I do not see this a clear or fair representation. As well as this, with a product such as beer, consumers would not be as responsive to drastic differences in prices as with other items. Simply because of tastes and preferences, some consumers not matter the price, will continue to drink a certain beer or vacation and drink in a certain area simply because they like it best. Overall I feel that PPP cannot exist in reality, and will only therefore be valid in theory. Although this idea is interesting, does the PPP in theory not concern itself with a variety of different goods that can be easily obtained in a multitude of nations rather than one single product?

Moreover, the questions raised by many of the other students I feel would need to be answered before a clear analysis of this index can be made. I do not feel that this chart clearly represents the PPP theory and as Myrthe mentions unless the factors that she has outlined have been taken into consideration I do not see this a clear or fair representation.

As well as this, with a product such as beer, consumers would not be as responsive to drastic differences in prices as with other items. Simply because of tastes and preferences, some consumers not matter the price, will continue to drink a certain beer or vacation and drink in a certain area simply because they like it best.

Overall I feel that PPP cannot exist in reality, and will only therefore be valid in theory.

]]> By: Myrthe van Vliet http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7182 Myrthe van Vliet Tue, 16 Dec 2008 19:05:23 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7182 As others have pointed out, is it an average price of beer? Or is it a specific beer found in all these countries? Naturally locally grown beers should have an advantage in LED countries, cheap labour and no transportation costs. Richer countries would have a higher price of beer, taking Switzerland as an example; it has a low tax rate on income, but goods and services cost more. This makes it seem as if though beer costs more, but a Swiss person would have less tax to pay from its income; balancing out the high prices of goods and services with the low tax rate. Thus the PPP for beer leaves out some important factors. Or has all of this been taken into account? As others have pointed out, is it an average price of beer? Or is it a specific beer found in all these countries? Naturally locally grown beers should have an advantage in LED countries, cheap labour and no transportation costs. Richer countries would have a higher price of beer, taking Switzerland as an example; it has a low tax rate on income, but goods and services cost more. This makes it seem as if though beer costs more, but a Swiss person would have less tax to pay from its income; balancing out the high prices of goods and services with the low tax rate. Thus the PPP for beer leaves out some important factors. Or has all of this been taken into account?

]]> By: Lisa G http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7167 Lisa G Mon, 15 Dec 2008 23:28:46 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7167 I agree with the Meri, Joel and Miguel said about this representation of ppp from this data/graph. I think that in a world where there are not geographical, ethical, religious or government-ical differences, the difference in prices would accurately represent ppp and exchange rates and so on. However, in this case the data giving do not reflect this, as many different factors affect the price of a good. For example, the most expensive beer in the world, according to the data is from the Marshall Islands, which are pretty much in the middle of the pacific ocean, will logically have very high beer priced due to lack of beer producing the Islands themselves (meaning it has to imported) and the cost of transportation. Geography is large factor, however so is the stability of a country, as seen in the data, the countries with the most expensive beer are those with the high standards of living (eg: Monaco, Norway, Burundi…). As standard of living is high, so is the price of goods (as can be seen in Switzerland). I think that one factor which may affect the cheap prices of beer could be the fact the here is very low demand for beer (low demand equals low prices): the countries with the cheapest beer (NK, Myanmar, Djibouti and Ethiopia) as no know for their beer and alcohol cultures, this may be due to tradition, religion and social acceptability etc. One more thing about this statistic, which Miguel pointed out, is there is very large variety of beers in the world, and as this is not done or indicated on the is graph, this graph does not show valid conclusions. However, data is very interesting and useful; it does not correctly or accurately represent the concept of ppp. I agree with the Meri, Joel and Miguel said about this representation of ppp from this data/graph. I think that in a world where there are not geographical, ethical, religious or government-ical differences, the difference in prices would accurately represent ppp and exchange rates and so on. However, in this case the data giving do not reflect this, as many different factors affect the price of a good.
For example, the most expensive beer in the world, according to the data is from the Marshall Islands, which are pretty much in the middle of the pacific ocean, will logically have very high beer priced due to lack of beer producing the Islands themselves (meaning it has to imported) and the cost of transportation.
Geography is large factor, however so is the stability of a country, as seen in the data, the countries with the most expensive beer are those with the high standards of living (eg: Monaco, Norway, Burundi…). As standard of living is high, so is the price of goods (as can be seen in Switzerland).
I think that one factor which may affect the cheap prices of beer could be the fact the here is very low demand for beer (low demand equals low prices): the countries with the cheapest beer (NK, Myanmar, Djibouti and Ethiopia) as no know for their beer and alcohol cultures, this may be due to tradition, religion and social acceptability etc.
One more thing about this statistic, which Miguel pointed out, is there is very large variety of beers in the world, and as this is not done or indicated on the is graph, this graph does not show valid conclusions.
However, data is very interesting and useful; it does not correctly or accurately represent the concept of ppp.

]]> By: Meri http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7163 Meri Mon, 15 Dec 2008 22:20:12 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7163 I think Joel made a very interesting point there about the stability of the governments, I would have not thought about that. But why do these countries than have such expensive beer? well Miguel also pointed out that there isnt only one type of beer available but many different kinds but we do not know what is sold in each country. for the poor countries, could most of the beer be imported but also restricted with tariffs etc that would increase the price. A larger in Finland costs 6.76 USD but Finland also makes a lot of its own beer, so does it matter which brand the beer is or are all the prices just averages? I kinda lost the track here I think Joel made a very interesting point there about the stability of the governments, I would have not thought about that. But why do these countries than have such expensive beer? well Miguel also pointed out that there isnt only one type of beer available but many different kinds but we do not know what is sold in each country. for the poor countries, could most of the beer be imported but also restricted with tariffs etc that would increase the price. A larger in Finland costs 6.76 USD but Finland also makes a lot of its own beer, so does it matter which brand the beer is or are all the prices just averages?

I kinda lost the track here

]]> By: Oliver http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7153 Oliver Mon, 15 Dec 2008 14:15:31 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7153 Joel, i agree with you about that Zambia is a very stable country, and also the fact that the unstable countries have cheaper beer. Also your point about why this is could very wel be true. Joel, i agree with you about that Zambia is a very stable country, and also the fact that the unstable countries have cheaper beer. Also your point about why this is could very wel be true.

]]> By: Joel http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7148 Joel Sun, 14 Dec 2008 11:38:00 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7148 I think there are some patterns in the data. Has anyone noticed that the countries with the cheapest beer largely have despotic or unstable governments. Likewise, the ones with the most expensive beers are quite stable. Now you're going to think: what about Zambia? Isn't that one of those African countries with unstable reigimes? Wrong! Zambia is a former British Colony, once a part of Rhodesia. It's basically Zimbabwe gone right. As far as I can gather, it now has a stable, democratically elected regime. It's economy has enjoyed a steady rate of growth over the last few years, and it is going from strength to strength. So why is beer expensive in countries with stable regimes, and cheap in those in which they are unstable? One theory I can offer, is that due to frequent unrest in countries with despotic or unstable regimes, one way in which they attempt to appease the population is by offering them cheap beer. How many drunk men can topple a regime? Sounds like a joke, but it could be quite close to reality. I think there are some patterns in the data. Has anyone noticed that the countries with the cheapest beer largely have despotic or unstable governments. Likewise, the ones with the most expensive beers are quite stable.

Now you’re going to think: what about Zambia? Isn’t that one of those African countries with unstable reigimes? Wrong! Zambia is a former British Colony, once a part of Rhodesia. It’s basically Zimbabwe gone right. As far as I can gather, it now has a stable, democratically elected regime. It’s economy has enjoyed a steady rate of growth over the last few years, and it is going from strength to strength.

So why is beer expensive in countries with stable regimes, and cheap in those in which they are unstable? One theory I can offer, is that due to frequent unrest in countries with despotic or unstable regimes, one way in which they attempt to appease the population is by offering them cheap beer. How many drunk men can topple a regime? Sounds like a joke, but it could be quite close to reality.

]]> By: Miguel http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7145 Miguel Sun, 14 Dec 2008 07:33:17 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7145 Although this article is using the same principle as the big mac index. This table for beers is not a clear indication of purchasing power parody theory. The reason for this is that there are different kinds of beers in different countries. To make this a more accurate study, only one make and kind of beer should be used. Although this article is using the same principle as the big mac index. This table for beers is not a clear indication of purchasing power parody theory. The reason for this is that there are different kinds of beers in different countries. To make this a more accurate study, only one make and kind of beer should be used.

]]> By: Elisabeth Spielbichler http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7134 Elisabeth Spielbichler Thu, 11 Dec 2008 21:10:13 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7134 You can also look at the Big Mac Index which they use for the PPP theory, which we actually looked at in class. On that chart they compare prices of Big Macs around the world in terms of US dollars. We compared the prices of a Big Mac in Switzerland compared to the price of a big mac in the USA. It actually costs more to buy a big mac in Switzerland than in the US. This suggests that the Swiss franc is overvalued compared to the US dollar. That means that Switzerland has to depreciate their currency so it comes to the same level as the US Dollar. Like that, buying a burger in Switzerland will cost the same in the dollar currency in the US. You can also look at the Big Mac Index which they use for the PPP theory, which we actually looked at in class. On that chart they compare prices of Big Macs around the world in terms of US dollars. We compared the prices of a Big Mac in Switzerland compared to the price of a big mac in the USA. It actually costs more to buy a big mac in Switzerland than in the US. This suggests that the Swiss franc is overvalued compared to the US dollar. That means that Switzerland has to depreciate their currency so it comes to the same level as the US Dollar. Like that, buying a burger in Switzerland will cost the same in the dollar currency in the US.

]]> By: Manka http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/comment-page-1/#comment-7132 Manka Thu, 11 Dec 2008 16:28:26 +0000 http://welkerswikinomics.com/blog/2008/06/01/purchasing-power-parity-for-the-inebriated-masses/#comment-7132 the principle of Purchasing Power Parity basically means, bringing the value of currencies to a level where it costs the same amount to buy a particular good. This means, that for a big mac burger in USA, it would cost lets say $5, and the same burger would cost $6.30 in Switzerland. This would imply that, swiss francs is overvalued and needs to be depreciated a bit until the burger in Switz. also costs $5. Free trade sounds good in theory, but in reality it can't exist because governments seem to interfer in the market, for example: they need to proect domestic industries, thus they impose barriers of trade. Another example could be managed exchange rate, like what China is doing. So, it is not possible to appreciate or depreciate the currencies to bring them to a same level. Besides, it also depends on the demand of goods in countries. For example, it may be possible that US consumers don't want to buy anything from Mexico. And mexican consumers are demanding US burgers. Due to exchange rate differences, burgers cost more in Mexico. Now, if we follow the PPP theory, then the USA should increase the demand of mexican goods so that Mexican Peso appreciates and it costs mexicans to buy the burger at the same price in USA. But, since, US consumers are not demanding anything from Mexico, there is no way that the exchange rates becomes similar. so, basically, the Purchasing Power Parity only exists in theory. the principle of Purchasing Power Parity basically means, bringing the value of currencies to a level where it costs the same amount to buy a particular good. This means, that for a big mac burger in USA, it would cost lets say $5, and the same burger would cost $6.30 in Switzerland. This would imply that, swiss francs is overvalued and needs to be depreciated a bit until the burger in Switz. also costs $5.

Free trade sounds good in theory, but in reality it can’t exist because governments seem to interfer in the market, for example: they need to proect domestic industries, thus they impose barriers of trade.
Another example could be managed exchange rate, like what China is doing.
So, it is not possible to appreciate or depreciate the currencies to bring them to a same level. Besides, it also depends on the demand of goods in countries. For example, it may be possible that US consumers don’t want to buy anything from Mexico. And mexican consumers are demanding US burgers. Due to exchange rate differences, burgers cost more in Mexico. Now, if we follow the PPP theory, then the USA should increase the demand of mexican goods so that Mexican Peso appreciates and it costs mexicans to buy the burger at the same price in USA. But, since, US consumers are not demanding anything from Mexico, there is no way that the exchange rates becomes similar.

so, basically, the Purchasing Power Parity only exists in theory.

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