What Is Purchasing Power Parity – PPP?
Every three years, the World Bank releases
One popular macroeconomic analysis
metric to compare economic productivity
and standards of living between countries is
purchasing power parity (PPP). PPP is an
economic theory that compares different
countries' currencies through a "basket of
goods" approach.
According to this concept, two currencies
are in equilibrium—known as the currencies
being at par—when a basket of goods is
priced the same in both countries, taking
into account the exchange rates.
KEY TAKEAWAYS
Purchasing power parity (PPP) is a popular
metric used by macroeconomic analysts.
PPP compares economic productivity and
standards of living between countries.
Some countries adjust their gross domestic
product (GDP) figures to reflect PPP.
Calculating Purchasing Power Parity
The relative version of PPP is calculated
with the following formula:
Where:
S represents the exchange rate of currency
1 to currency 2
P1 represents the cost of good X in currency
1 However, some accounting goes even
P2 represents the cost of good X in currency
2 This adjustment attempts to convert nominal
Comparing Nations' Purchasing Power
Parity
To make a meaningful comparison of prices
across countries, a wide range of goods and
services must be considered. However, this
one-to-one comparison is difficult to achieve
due to the sheer amount of data that must
be collected, and the complexity of the
comparisons that must be drawn. So, to
facilitate this with greater ease, in 1968, the
University of Pennsylvania and the United
Nations joined forces to establish the
International Comparison Program (ICP).
With this program, the PPPs generated by
the ICP have a basis from a worldwide price
survey that compares the prices of
hundreds of various goods and services.
The program helps international
macroeconomists estimate global
productivity and growth.
a report that compares various countries, in
terms of PPP and U.S. dollars. Both the
International Monetary Fund (IMF) and the
Organization for Economic Cooperation and
Development (OECD) use weights based
on PPP metrics to make predictions and
recommend economic policy. The
recommended economic policies can have
an immediate short-term impact on financial
markets.
Also, some forex traders use PPP to find
potentially overvalued or undervalued
currencies. Investors who hold stock or
bonds of foreign companies may use the
survey's PPP figures to predict the impact of
exchange-rate fluctuations on a country's
economy, and thus the impact on their
investment.
Pairing Purchasing Power Parity With Gross
Domestic Product
In contemporary macroeconomics, gross
domestic product (GDP) refers to the total
monetary value of the goods and services
produced within one country. Nominal GDP
calculates the monetary value in current,
absolute terms. Real GDPadjusts the
nominal gross domestic product for inflation.
further, adjusting GDP for the PPP value.
GDP into a number more easily comparable
between countries with different currencies.
To better understand how GDP paired with
purchase power parity works, suppose it
costs $10 to buy a shirt in the U.S., and it
costs €8.00 to buy an identical shirt in
Germany. To make an apples-to-apples
comparison, we must first convert the €8.00
into U.S. dollars. If the exchange rate was
such that the shirt in Germany costs $15.00,
the PPP would, therefore, be 15/10, or 1.5.
In other words, for every $1.00 spent on the
shirt in the U.S., it takes $1.50 to obtain the
same shirt in Germany buying it with the
euro.
Nations With the Highest PPP
There are five nations that have the highest
GDP in market exchange terms. The list is
as follows:
United States
China
India
Japan
Germany
However, this comparison changes with the
introduction of purchasing power parity.
According to 2017 data from the
International Monetary Fund, based on
purchasing power, China boasts the world's
largest economy, with 23,122 billion current
international dollars. The U.S. comes in
second with 19,362 billion. India, Japan,
and Germany follow with 9,447 billion, 5,405
billion, and 4,150 billion, respectively.
Drawbacks of Purchasing Power Parity
Since 1986, The Economist has playfully
tracked the price of McDonald's Corp.’s
(MCD) Big Mac hamburger, across many
countries. Their study results in the famed
"Big Mac Index". In Burgernomics—a
prominent 2003 paper that explores the Big
Mac Index and PPP—authors Michael R.
Pakko and Patricia S. Pollard cited the
following factors to explain why the
purchasing power parity theory does not line
up with reality.
Transport Costs
Goods that are unavailable locally must be
imported, resulting in transport costs. These
costs include not only fuel but import duties
as well. Imported goods will consequently
sell at a relatively higher price than do
identical locally sourced goods.
Tax Differences
Government sales taxes such as the value-
added tax (VAT) can spike prices in one
country, relative to another.
Government Intervention
Tariffs can dramatically augment the price
of imported goods, where the same
products in other countries will be
comparatively cheaper.
Non-Traded Services
The Big Mac's price factors input costs that
are not traded. These factors include such
items as insurance, utility costs, and labor
costs. Therefore, those expenses are
unlikely to be at parity internationally.
Market Competition
Goods might be deliberately priced higher in
a country. In some cases, higher prices are
because a company may have
a competitive advantage over other sellers.
The company may have a monopoly or be
part of a cartel of companies that
manipulate prices, keeping them artificially
high.
The Bottom Line
While it's not a perfect measurement metric,
purchase power parity does let one
compare pricing between countries with
differing currencies. Just don't try to buy a
hamburger in Luxembourg if you plan on
exchanging your money for Russian rubles!
On February 20, 2019, Pres. Rodrigo R.
Duterte signed into law Republic Act No.
11223 (R.A. 11223) entitled “An Act
Instituting Universal Health Care For All
Filipinos, Prescribing Reforms in the Health
Care Systems, And Appropriating Funds
Therefore”.
R.A 11223 or The Universal Health Care
Act is enacted pursuant to “the policy of the
state to protect and promote the right to
health of all Filipinos and instill health
consciousness among them.”
It adopts the following policies, to wit:
a. An integrated and comprehensive
approach to ensure that all Filipinos are
health literate, provided with healthy living
conditions, and protected from hazards and
risks that could affect their health;
b. A health care model that provides all
Filipinos access to a comprehensive set of
quality and cost effective, promotive,
preventive, curative, rehabilitative and
palliative health services without causing
financial hardship, and prioritizes the needs
of the population who cannot afford such
services;
c. A framework that fosters a whole-of-
system, whole-of-government and whole-of-
society approach in the development,
implementation, monitoring and evaluation
of health policies, programs and plans; and
d. A people-oriented approach for the
delivery of health services that is centered
on people’s needs and well-being and
cognizant of the differences in culture,
values and beliefs.
The following are the objectives in enacting
R.A 11223 :
1. Progressively realize universal health
care in the country through a systemic
approach and clear delineation of roles of
key agencies and stakeholders towards
better performance in the health system;
and
2. Ensure that all Filipinos are guaranteed
equitable access to quality and affordable
health care goods and services, and
protected against financial risk.
The Universal Health Care Act mandates
that “every Filipino will be granted
immediate eligibility and access to
promotive, preventive, curative,
rehabilitative and palliative care for medical,
dental, mental and emergency health
services”. It also decrees that the program
membership for the National Health
Insurance Program be simplified to direct
contributors and indirect contributors.
The Republic Act 10931 or the Universal
Access to Quality Tertiary Education
Act may seem a bit complicated, but we've
rounded up the important things you need to
know about it.
It covers other fees as well.
RA 10931 includes "library fees, computer
fees, laboratory fees, school ID fees,
athletic fees, admission fees, development
fees, guidance fees, handbook fees,
entrance fees, registration fees, medical
and dental fees, cultural and other similar or
related fees."
The government will also provide a stipend
for poor students. It also establishes a loan
program for students who are in need.
The Commission on Higher Education
(CHED) said in June 2016 that it will offer
cash grants to medical students in
public medical schools.
But it is not free for all.
The free tuition fee only applies to
undergraduate students who are taking a
bachelor's degree for the first time.
This means that those who are going to get
their second degree are ineligible.
More from Candymag.com
The Free Tuition Bill Has Officially Been
Signed Into Law
The same thing also applies when taking
vocational or certificate courses in
technical-vocational institutions.
Students who have a bachelor's degree
from a private or public institution or those
who already finished a vocational degree
before are not eligible anymore.
A student should finish the degree on
the allotted period of time.
Failure to do so will mean that you have to
pay the fees themselves during the
exceeding period of time.
Talks and arguments about its funding
are still ongoing.
While there are still a ton of ongoing talks
and arguments about where the bill will get
its funding, how this affects those who really
can afford to pay, and its implementing rules
and regulations (IRR), we can all be sure
that the president is dead set on really
implementing this new law.
As Senior Deputy Executive Secretary
Menardo Guevarra said in his
announcement, "Free tertiary education in
state universities and colleges is a pillar or
cornerstone of the President's social
development policy so he weighed
everything and came to the conclusion that
the long-term benefits that will be derived
from a well-developed tertiary education will
definitely outweigh any possible short-term
budgetary challenges. So as we say, 'If
there's a will, there's a way.'"
They said that they are leaving the decision
to the Congress to figure out a way to best
fund the bill.