I have the average price of a GB of data / internet across 45 different countries. I want to be able to compare the price of using data on the people in that country.

Let's say 1 GB of data costs 1.37 USD in the USA and the equivalent of 1.1 USD (regular conversion rate) in China. I cannot state the the internet is "cheaper" in China than it is in the US, as 1.1 USD in China could buy so much more for a family living there and therefore is more taxing on their income than 1.37 USD would be on an American family.

How can I compare the effect that spending these 2 values could have on a family in these 2 countries? Would the purchasing power parity be the right way to go here? If so, can someone explain to me how to use it? I looked up the PPP in China, and it's 4.15.

I read online that to compare the price of the good across both countries we would calculate: 1.1 / 1.37 / 4.15 = 0.19. So the price of a GB of data is about a fifth of that in the US? And not almost the same? But that's not what I'm looking for, I'm looking for a number that would tell me that since life is so much cheaper in China, and spending a dollar is so much more taxing.

Wouldn't (1.1 / 1.37) * 4.15 = 3.33 make more sense? So spending 1 USD in the USA on internet would be equivalent to spending 3.33 USD in China for the same amount of internet?

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    $\begingroup$ You may want to look at exchange rates based on Purchasing Power Parity (or Purchasing Power Standard). The OECD publishes numbers as do others which may be useful $\endgroup$ – Henry Oct 14 '20 at 12:48
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    $\begingroup$ If you could find average disposable income measures, you could express the cost as a percentage of that. The problem with that approach is finding reliable, timely, data. One could use per capital GDP, but that raises other issues, such as GDP measurement standards not being the same. I have seen comparisons of food spending as a percentage of income, but it’s not heavily used, probably due to the data comparison issues. $\endgroup$ – Brian Romanchuk Oct 14 '20 at 12:57
  • $\begingroup$ @BrianRomanchuk could one use the GPD (PPP) as shown here: en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP) this is measured based on PPP. $\endgroup$ – BKS Oct 15 '20 at 13:35
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    $\begingroup$ You need an apples-to-apples comparison. If you are looking at local currency data costs, you would need to compare to local currency GDP. The issue is that per capita GDP is not the same thing as average disposable income, which is what you really want. $\endgroup$ – Brian Romanchuk Oct 15 '20 at 13:45

Purchasing Power Parity (PPP) is probably the most convenient way of doing such comparisons so you are on right track. As mentioned in the comments there are other ways how to do international price comparisons but PPP is probably one of the few ways that do not require much auxiliary estimation/research as it is already readily avaiable to public.

PPP works in a very similar way to an exchange rate. In fact PPP is sort of an exchange rate built under the assumption that the law of one price holds (Krugman et al (2012). International Economics: Theory and Policy). Consequently PPP is an alternative to market exchange not another factor you use on top of it (so the calculations in question are not appropriate).

For example, if in China 1 GB of data costs $¥10$ and PPP is $4.15 \frac{¥}{\\\$}$, the adjustment would be made as: $¥10/(4.15 \frac{¥}{\\\$})\approx {\\\$}2.41$. Afterwards, the prices can be compared as apples to apples so in this case 1GB of data in China would be more expensive than 1GB of data in US (which according to your data costs ${\\\$}1.37$ ), once adjusted for PPP (although I just made the $¥10$ price up you should use your prices).

Note, even tough it is not always stated PPP is implicitely expressed in $\frac{\text{local currency}}{USD}$ since it is based on comparison of price levels of two countries and by convention US is always in denominator. In fact most datasets will even warn you about this. For example, OECD dataset reports its PPP as:

Purchasing power parities (PPP)Total, National currency units/US dollar, [emphasis is mine]

You can read more about PPP in Krugman et al. International Economics: Theory and Policy 9th ed. Chapter 16. It is an undergraduate textbook so it contains some worked simple examples.


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