ARGUMENTS AGAINST

PPP IS THE BEST MEASURE TO COMPARE

PRICES AND ECONOMIES

Presented BySandeep Mathew Olickal

07927811Group # 19

INTRODUCTION TO PPP Rate of currency conversion

To equalize purchasing power of different countries

To eliminate differences in price levels

Ratio of prices in national currencies

Concept of One Price

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USES OF PPP To compare the price levels in economies To compare GDP/Expenditure of Economies

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PPP is the best measure to compare prices and economiesPPP PPP (percapita)

Power GenerationEnglish Speakers

USERS OF PPP IMF/UN/World Bank Researchers/Universities/Govt Agencies

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PPP is the best measure to compare prices and economies

Tsunami Fund

CHARACTERISTICS OF THE BEST MEASURE

Shall be better than every other possible measures of comparison

Shall be applied universally without exceptions

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PPP is the best measure to compare prices and economies

ANALYSIS : PPP A BEST MEASURE ??

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PPP is the best measure to compare prices and economies

TO COMPARE PRICES

14-11-2007 PPP is the best measure to compare prices and economies

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TO COMPARE PRICES

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PPP is the best measure to compare prices and economies

WHY THIS VARIANCE ?

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PPP is the best measure to compare prices and economies

SENSITIVITY TO “INTERNATIONAL” PRICES

Parameters

China India

X1 1000 10X2 1 1000P1 1 10P2 5 5EXI 10005 5100EXC 1005 5010

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PPP is the best measure to compare prices and economies

SPPP,C = 0.10 SPPP,I = 0.98

COMPARISON OF ECONOMIES

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PPP is the best measure to compare prices and economies

GNP Vs GNP (PPP)

COMPARISON OF ECONOMIES Purchase Power Parity of Three Transition

Economies : David Barlow (Economies of Planning, 2003) Poland and Czech Republic (Advanced Transition) Romania (Lagging Transition)

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PPP is the best measure to compare prices and economies

Country 1 Country 2 RelevanceAdvanced Transition

Developed Economy

Advanced Transition

Lagging Transition

Lagging Transition Developed Economy

Advanced Transition

Advanced Transition

BUILDING A MODEL FOR AN ECONOMY

Better to model in local currency

Economic agents react to local prices & not PPP prices

Purchasing power is in local currency

Possibility of cross validation of models

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PPP is the best measure to compare prices and economies

RANKING BASED ON PPP

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PPP is the best measure to compare prices and economies

CONCLUSION

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PPP is the best measure to compare prices and economies

THANK YOU

14-11-2007 PPP is the best measure to compare prices and economies