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Lets start with the purchasing power parity which determines the relative value of currencies, the PPP economic theory estimates the amount of adjustment needed on the exchange rate between countries in order for it to be equivalent to or on par with each country’s purchasing power. How much money would you need to purchase the same goods and services in two countries? This is what the PPP rate answers and can then be used to calculate an implicit foreign exchange rate and can determine how much monetary power a specific amount of money has in different countries. The law of one price, taking into account the absence of transaction costs and official trade barriers, outcome is identical goods being the same price when expressed in the same currency. However market exchange rates are volatile and are affected by political, economic and financial factors, this results in the one-to-one price comparison being different in each country, with the standard of living in poor countries being steadily understated. PPP rates therefore facilitate international comparisons of income, when there are deviations from parity this is indicative of differences in purchasing power of a “basket of goods” across countries. The PPP rate adjustments into common units are therefore required for the purposes of international comparisons of countries’ GDPs or other national income statistics. The result is that the real exchange rate is equal to the nominal exchange rate. If the PPP held exactly, then the real exchange rate adjustment would always equal to one. However, the real exchange rates exhibit both short and long-term deviations from this value and therefore there can be a vast difference between purchasing power adjusted incomes to those merely converted by market exchange rates. The Big Mac Index is an excellent example of measuring the law of one price, which underlies the PPP. This index compares the prices of a Big Mac Burger in McDonalds’ restaurants in different countries. What is important about the index is that it takes into account factors such as the input costs from a wide range of sectors such as the local economy including agricultural commodities, labour, advertising, rent and real estate costs, transportations, etc. If you are offered a job overseas, in another country or state, it is a good idea to check how your salary will compare taking purchasing power factors into account before your move. Xpatulator.com makes this process easy, using your current salary to compare whether the offer is higher or lower than what you earn now, in terms of local purchasing power. The Salary Purchasing Power Parity then calculates how much you need to earn in another location to compensate for cost of living, hardship, and exchange rate differences, in order to have the same relative spending power and as a result have a similar standard of living as you have in your current location. For more information on cost of living, salary purchasing power parity, cost of living index or allowances go to www.xpatulator.com
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salary purchasing power parity, SPPP, purchasing power parity, cost of living, expatriate cost of living,
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