1
$\begingroup$

I'm measuring some very specific items (across 5 countries) using my country's currency as the base. My questions are:

  1. How should I address PPP in this case? (Is it just like the example in Table 1 here?)

  2. What are the limitations if I decided to just use the market exchange rate? Is it considered "fair"?

Improve this question
$\endgroup$
3
  • $\begingroup$ Using PPP would mean you were comparing the prices of your five items to the basket used for PPP (Big Macs in your linked example). This may not be what you want: do you want to say a car costs 10,000 Big Macs in one country and 8,000 Big Macs in another? $\endgroup$
    – Henry
    Oct 9, 2017 at 8:03
  • $\begingroup$ Sorry for the confusion. I have all the prices of the items in different currencies, so theoretically, dividing the prices by the base item's price will get me the PPP, right? I just want to know if there's anything wrong with this approach and if there are other ways to compare prices fairly. $\endgroup$
    – Karie
    Oct 9, 2017 at 8:18
  • $\begingroup$ I'm comparing the prices of steel (per tonne) across 5 countries. I have found out the prices of the same items in different countries in its local currency. $\endgroup$
    – Karie
    Oct 9, 2017 at 8:30

1 Answer 1

Reset to default
1
$\begingroup$

As you are interested in very specific items, using an aggregate PPP measure like the ones provided by the World Bank (which are as aggregate as the GDP or private consumption), or the Big Mac index is not very good idea. This answer explains in some detail how PPPs are calculated ((the bottom line is that aggregate PPPs include a whole range of products; see here for more details).

If you are interested in just a few products, or maybe a single product (steel), as one of your comments suggest, you have to look into a more dissagregate PPP. You can find it here. These PPPs are still quite aggregate (for example, in the Classification tab you can find the full list). In your case, you might be interested in the Gross Fixed Capital Formation: Construction index. See here for more details on what this index includes. Notice that this is still quite an aggregate measure of PPP. Another drawback is that this is only available for either 2011 or 2005.

A final note is that you are normally one adjusts for PPP when the interest is in comparing cost of living or wellbeing across countries. Adjusting for PPP makes less sense when the comparison is for example about the cost of sourcing a material from different countries. Here, exchange rates is what you need, as this reflects the actual cost for firms of selling/buying a product in different markets. As you do not provide the context of your question, it is not possible to tell whether PPP is pertinent or not to you.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.