Purchasing Power Parity Indexes Fail to Take Regional Conditions into Account
What is the actual average price of a Big Mac, Venti Coffee at Starbucks, a gallon (or liter) of petroleum or rent for an 2 Bedroom, 2 Bathroom Apartment in a particular country? The answer is “It depends.” Indexes that provide some sort of a comparable product across borders are providing a tongue-in-cheek method of measuring purchasing power, but conditions are such that there is no way to truly generalize the conditions on a national level. There are websites that do a fairly good job at providing a general idea of cost-of-living matters city-by-city and how far money can go on a USD standard basis. With greater information available and mobile purchasing, the information gap has been reduced and it is far more difficult to justify the generalization of purchasing power on a national basis.
Purchasing Power Parity (PPP) Indexes Mask Regionalization
Take a tourist who has never been to the United States and have them visit New York and only New York. Their opinions of the United States and the citizenry would be biased toward their experiences in the 5 Boroughs. How they perceive price and culture would only be seen through the prism of this city, which happens to have multiple cultures and regional pride within The City. After all, an afternoon with Staten Islanders is probably going to be different from an evening in Jackson Heights. However, it still is a rather insulated experience for the visitor as it only provides one taste of the country.
One can do the same with a tourist visiting Paris and having that city serve as a representation of France or a tourist visiting Buenos Aires and expecting the city to serve as a representation of Argentina.
The Big Mac Index in the United States takes an average price of a Big Mac from Atlanta, Chicago, San Francisco, and New York.
Regional conditions are very different in larger, developed countries. These countries have regional conditions that are so disparate that the regions are like different countries themselves.
A $1 USD difference makes a big difference in the above as it can alter the cost of a tank of gas by between $10 and $30 USD.
Based on fuel prices alone, it would seem like the United States is split up into at least five different countries and economies.
Fractured Economic Environments Operating in a Global Economy
Economic fortunes are still disparate on a regional basis within larger countries and the cost of living is drastically different. Globalized economics with local consequences and styling.
Defining the strength of a currency on an average basis is far less accurate than defining how the strength of a currency is in a particular portion of a country(ies). It can speak to the strength of not only the currency, but the country and provide some form of direction in terms of the economic changes within a country rather than paint a broad brush. It also can point to both positive and negative trends that regions within a country may face. It requires a new method of indexing because the consumer products are actually quite relatable.
Are there parts of a country that serve as leading indicators for a currency’s strength, the strength of a national economy or provide some sort of an indication of strength for particular equities?
These relationships need to be explored. There’s potential here.