What Is Purchasing-Power-Parity?

Macro-economic practitioners use the idea of “purchasing power parity” to establish the standard of living between countries. How much does a given basket of goods cost in country A, compared to Country B.? Suppose a meal for four  at a middle range restaurant in Country A costs $100 with tip and tax. In country B the same meal considering quality, service, and ambience costs the local of equivalent of $50. Using purchasing power parity we might decide that the currency standard of GDP in country B should be multiplied  by two for comparison of lifestyle. Interesting but it hides something important.

Social Overhead

The question of why is it different should be next. It seldom is asked and we are left with intuition as our guide. Maybe waiters make less in Country B. Maybe food is less expensive. Maybe  rent is lower. Have you ever asked why?

Maybe there are reasons that have to do with regulation, taxes, and other social institutions.

What is the minimum wage for servers in Canada versus India. What are the health regulations in respect to how you run a restaurant? What are the zoning bylaws, construction standards, and the price of commercial property in Country B. Is commercial land expensive in country A because of political choices? What is the relative cost of heat, hydro, water, insurance, garbage removal, and a dozen more.

Are income tax and sales tax levels about the same? If not what happens to the money?

By comparison to other countries, is it reasonable to believe that we pay a great deal for a meal and half the cost is for things we cannot identify? What do we get for our money is a reasonable question. We should ask it.

The bits to take away.

If things have a different price in different places, there is a reason. It’s easy to never ask why.

Governments and their bureaucracies are always looking for ways to expand. Since they pay no cost for the expansion, there are no practical limits to what makes sense for them. They have no check on their spending so the idea of anything worth doing is worth overdoing comes into play.

Understand how cost/benefit studies work and assess what is being done on your behalf.

Reject programs that have a cost greater than their benefit.

What governments take from you, or force you to pay by regulation, is money you cannot spend for your own purposes.

Help me, please. Please subscribe. If you have found this article helpful, forward it to others.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don@moneyfyi.com

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