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I'm trying to understand the relationship, if any, between the fact that countries have different relative prices (e.g. different 'food price-to-general consumer prices' ratios) impacts the need for purchasing power parity adjustments between countries.

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That's correct, the PPP adjustments are made to account for the fact that living in some places is more expensive than in others. So if you are comparing two places with equal relative prices, their PPP index should be the same, and so it is irrelevant if you use the adjustment or not.

Note that saying that prices are the same in different countries can be quite tricky, since typically goods that can be found in some countries are not even sold in other countries. But in principle, the PPP is trying to adjust for the fact that the same 100 American dollars have a larger purchasing power in some countries than in others.

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  • $\begingroup$ So relative prices matter, but so do consumption patterns, no? Even if Australia and the Canada have similar relative prices, their consumption patterns may differ and thus their PPPs would also move further apart - no? $\endgroup$ – StatsScared Apr 29 at 18:53
  • $\begingroup$ In principle, consumption patterns should not matter. Ideally, the PPP would be constructed by taking a basket of goods that the average person will buy, and compare its cost across countries. Therefore, it implicitly assumes that such a basket of goods exists, that it is comparable across countries (for example with equal quality) and that the average person in all countries consumes it. The Big Mac Index, for example, receives some attention, as one can argue that has all these properties. I'm sure at the end consumption patterns matter, but in principle, they should not. $\endgroup$ – Regio Apr 30 at 15:46

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