All opinions are my own.

Monday, October 29, 2007

Purchase Power Parity

In the globalized world “purchase power parity” is a necessary and an important consideration. However, this is never discussed in most of the printed news.

Reasons for this consideration are very simple. Except for few financially savvy individuals, majority does not understand it. People convert one currency into other, look at the absolute number, and compare them. This is especially true when British pound, dollar, Euro, or other currencies are converted to currencies of supposedly low cost countries.

Normally Press converts the foreign currency to the currency of their readership. Since the readers are not familiar with the purchase power of one currency to the other, reader gets the impression that the people are living in poverty or living like kings. The disparity between the absolute numbers is the reason why the jobs are going to low wage countries.

An example will illustrate the point. In India, a five pack of chewing gum costs about Rs. 5. In US, the same five pack costs about $0.80. At the rounded exchange rate of $1.00 = Rs. 40.00, one can buy about eight five packs for Rs. 40.00 in India. This clearly states that the buying power of the Indian rupee is higher than the buying power of dollar. McKinsey & Co. in its one of its report suggests the purchase power parity of Indian rupee to US dollar to be about 8.5.

Thus, it is relevant that the wages etc be compared on apple-to-apple basis rather than apple to tomato basis, since both happen to be round objects.

“Purchase power parity” can be offset by innovation.

Girish Malhotra

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