Purchasing Power Parity the Idea Essay

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If the average person has two sets of clothes in one society and thirty in another, then the parity of price of clothes is hard to assess. It certainly cannot be assessed in terms of the cost alone or the number of outfits that a person "should" have (Taylor & Taylor, 2004). It might be set at the percentage of annual wages that a person spends on clothing, but even this can be very approximate because of different ideas of what constitutes a sufficient amount of a particular type of good needed for a satisfactory life.

To compensate for the fact that goods can and usually do have different values even when they have the same costs in different countries, economists can use a "relative" version of purchasing power parity in which no absolute value is attempted between certain goods or groups of goods and the only thing that is set at parity is the exchange rate of the two currencies as they are affected by both depreciation and appreciation.

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The more similar two nations are, the easier it is to determine (whether by absolutist or relative methods) the parity of purchasing power for residents in those two nations. However, even when the economies and societies in question are relatively equivalent, sometimes a proxy in the form of an "international dollar" is used to create a neater equation for setting parity (Burdet & Judd, 1983).

Using the data from 2010 gathered by the OECD, we can examine a graphical representation of purchasing parity across the world, including the United Kingdom and Swizterland. (Country statistical profiles.)

OECD Factbook 2010: Economic, Environmental and Social Statistics - ISBN 92-64-08356-1 - © OECD 2010

Prices - Prices, labour costs and interest rates - Consumer price indices

CPI: all items

3-year average at the beginning of period

3-year average at the end of period

Average annual growth in percentage

United Kingdom

PRT

3.197063457

2.732998412

Portugal

EU27

4.951715971

2.798027689

EU27 total.....

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