Take a simple example of Japan and the US. Say the market exchange rate is 110 Yens = One US$. Now take an equivalent basket--in quantity and quality--that contains a burger with fries and a drink. It costs 450 Yens in Tokyo and US$ 2.50 in New York. The PPP exchange rate is then 180 Yens = One US$ (450/2.50). There is nothing imaginary about the PPP exchange rate since it gives you the purchasing power of a country's currency vis-a-vis the US dollar.
One thing I've never understood about PPP, is it an attempt to measure -what it is like living in a poor country- or is the idea more modest as the above paragraph suggests trying to demonstrate what the market equivalent amount of currency buys in a given country? For example the PPP GDP or GNP per capita of a country is $US 500. Does this mean that living in that country on that given amount of money is like living in the USA on the same amount of money?
PPP (and the averaging and aggregating that goes on) can be misleading.A string sampling bias exists. There are no price differences between countries in goods and services that are offered by MNC's. The costs of Mcdonalds,Bechtel water, Enron nat. gas, or a Blockbuster video is the same across geographical space with very limited differential. The IMF and its coat-tailers always (and ,yes, still) say that the most important economic fundamental is getting prices right. The right price or international market price always seems to be what the good or service costs in the USA. How could it be otherwise, inflation always exists and the bulk of demand for the goods and services offered by MNC's is still in the North hemisphere. Ultimately, the WTO project gets more goods and services to cost what they cost in the USA and Europe. And as that happens, people's access to those goods and services becomes more limited, Bechtel water in South Africa for example.
The products offered by local or import substituting businesses cost much less. The marlboro, pizza hut or coca-cola knockoff costs %25 as much. The more foreign based products it counts in its basket of goods, the bigger the PPP number will be. As the world becomes globalized and the stricter that gov'ts enforce WTO rules, the Atlas rather than ppp will come closer to the truth especially with imports and exports being priced in US dollars and the ongoing dollarization of world economies. I don't think this is an unimportant quibble, as it represents trends sometimes called combined and uneven development.
Sam Pawlett
