4
$\begingroup$

To be honest i have literaly zero economic knowlegde so please treat me as a noobie in this case. Here is the questin: I live in Poland where my native currency is polish zloty (PLN), and i want to buy some comon product like 1 liter of milk, but i'm not bounded by national boundary. So i have let say 100 PLN, and my goal is to buy as much milk as possible in one selected country that maximizes the amount of milk purchased.

How to acchive this? How can i compare immanent value of my 100 PLN around different countries, and select one country that alows for maximal milk purchase? In this whole process i must convert my 100 PLN into national currency (in optimal country) and then go to shop (in that country).

$\endgroup$
1
  • $\begingroup$ Is this question more simply, "Which country has the lowest price of milk?" $\endgroup$
    – user18
    Nov 10 '20 at 5:54
4
$\begingroup$

Money does not have any 'immanent value'. Value of money will fluctuate across time and also different regions (1USD does not have the same purchasing power in New York as it has in Arizona). This being said there are ways of doing international purchasing power comparisons that go beyond simple market exchange rate that can sometimes be misleading.

Purchasing power parity (PPP) is one of the ways that purchasing power can be compared across different countries. There are also other ways (see discussions in textbooks such Krugman et al (2012). International Economics: Theory and Policy) but PPP is one of the few ways that does not require extensive research.

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). Data on PPP can found from multiple sources one of them being OECD (however, not all countries are always included in some it is simply too dificult to collect data). Next PPP is by convention reported as $\frac{\text{local currency}}{USD}$. However, we can change this by dividing all individual PPPs for different countries by the Polish PPP as that will allows us to express everything per PLN (e.g. $\frac{\text{local currency}}{USD}/ \frac{\text{local PLN}}{USD} = \frac{\text{local currency}}{PLN}$).

Using this you can collect data on milk prices across all nations for which PPP data is avaiable and then compare the different prices directly. For example, if in China milk costs $20¥$ then you could adjust that with Chinese PPP expressed in terms of PLN (based on OECD data it would be approximately $2.4$) using $\frac{20¥}{2.4\frac{\text{¥}}{PLN}} = 8.33PLN$ and then simply compare this cost of milk in China expressed in PLN in terms of PPP to cost of milk in your local store.

I don't have any data on different milk prices across different countries (and I collecting them would be too much effort for SE answer), but just glancing at the PPP statistics it looks like PLN would have highest purchasing power in Indonesia. This being said, to be sure you should actually take the basket of goods you are interested in and make the comparison as described above.

$\endgroup$
1
  • $\begingroup$ Thank you very much. This is a very clear and informative answer. (+1) $\endgroup$ Nov 8 '20 at 5:49
3
$\begingroup$

I believe 1muflon1's answer is sufficient, but let me add a fun exercise The Economists does for quite a while now, the Big Mac Index. It is less of a scientific than a fun metric for PPP. If you are not interested in milk per se, but would be fine with Big Macs as well, here you go: https://www.economist.com/news/2020/07/15/the-big-mac-index. They update it twice a year and you can choose your baseline currency.

$\endgroup$
0
$\begingroup$

From your question, it appears that PPP (purchasing power parity) is not important to you. Instead, you want to know what countries' products are cheap for you at market exchange rates.

The bad news: goods that are traded internationally don't see much price difference from country to country (especially after correcting for transportation costs). So if you want to buy a car, then it won't be much cheaper in Gambia.

However, perishable goods don't transport well, and services don't transport at all. So a Polish person can get cheap milk, or a really cheap haircut, in Gambia. Or Bangladesh, or Indonesia, or other low-income developing countries.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

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