Jun 01 2008

Purchasing Power Parity – “for the inebriated masses”

pintprice.com – the price of beer anywhere in the world

The theory of purchasing power parity (or PPP) holds that in the long run, the price of a particular basket of goods should adjust across countries and currencies to “cost” the same amount regardless of the currency the goods are denominated in. In other words, one dollar should buy the same amount of “stuff” in the US as it does in Mexico, China, the Netherlands or anywhere else in the world. If a dollar buys MORE in one of these countries once it’s been converted to the local currency, it implies that the local currency is undervalued and should adjust in the long run to achieve parity in the amount it can purchase in dollar terms.

One popular measure of purchasing power parity, devised by the folks at the Economist magazine’s intelligence unit, is the Big Mac Index, which measures the price of McDonald’s Big Macs in over 100 countries where they can be purchased. You can read more about this index here.

The Economist magazine recently reported on an new alternative to its own PPP index, “the Price of a Pint”:

Barflies around the world provide a useful service for their beer-drinking comrades at PintPrice.com. The prices of pints of lager are compared on the basis of anecdotal evidence from beer-drinkers around the world, so figures are regularly updated. There are some surprising results. Beer in Zambia and Burundi seems eye-wateringly expensive considering that they are among the world’s poorest countries. The French overseas départments of Guadeloupe and Martinique charge just about as much as in mainland France. Beer-loving America and Britain fall somewhere in the middle. Happily for sports fans at the Beijing Olympics, a pint in China is just $2.46.

I thought it might be useful to some of our graduating seniors planning their summer vacations or gap years. Pay close attention to the data in this table.

(source: http://www.economist.com/displayStory.cfm?story_id=11333131)

So, if cheap beer is a priority in your vacation decision, it looks like North Korea and Myanmar are ideal destinations. I must say, I am relieved to see that Switzerland, my own new home, is not in the top ten… but it is far from cheap.

The website will tell you the average price of a pint of beer in any country in the world, and then break it down to cities within each country. In Zurich, my soon to be home, a pint costs the equivalent of $6.57 US. Compared to my hometown of Seattle, Washington, where a pint goes for $3.25, that’s exactly double the price! Surprisingly, however, a pint of beer here in Shanghai goes for a shocking $5.15, more than double the Chinese average of $2.35.

Apparently, the price of beer has more to do with the local supply and demand than with relative exchange rates. Where the Big Mac Index offers a rather genuine approach to determining purchasing power parity (since the Big Mac is an identical product sold by the same restaurant facing similar costs in over 100 countries), a pint of beer is a bit more subjective a measure of PPP. Quality of beers clearly differ in locales as diverse as North Korea and Luxembourg, not to mention the incomes of beer drinkers, the number of domestic brewers, excise and value added taxes, consumers’ price elasticities of demand, and so on.

As summer vacation approaches, however, vacation planners may care to take into account the “Price of a Pint” index of purchasing power parity. Clearly, one’s dollars will go much further at bars in some places than others.

I know what you 18 year old American high school grads are thinking, “Mexico or Canada?” You’ll just have to follow the link to find out!

(Disclaimer: Mr. Welker is in no way encouraging his former students to travel to certain places based solely on the cheap price of beer there, merely to avoid places where beer is clearly out of their price range!)

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

11 responses so far

11 Responses to “Purchasing Power Parity – “for the inebriated masses””

  1. Mankaon 12 Dec 2008 at 1:28 am

    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.

  2. Elisabeth Spielbichlon 12 Dec 2008 at 6:10 am

    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.

  3. Miguelon 14 Dec 2008 at 4:33 pm

    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.

  4. Joelon 14 Dec 2008 at 8:38 pm

    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.

  5. Oliveron 15 Dec 2008 at 11:15 pm

    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.

  6. Merion 16 Dec 2008 at 7:20 am

    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

  7. Lisa Gon 16 Dec 2008 at 8:28 am

    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.

  8. Myrthe van Vlieton 17 Dec 2008 at 4:05 am

    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?

  9. Deirdre Stensonon 17 Dec 2008 at 5:07 am

    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.

  10. Piaon 17 Dec 2008 at 6:30 am

    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.

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