The PPP Conundrum
It was late. My eyes were weary. The mind continued on its nonchalant process of flipping through photographs. Pressing the right arrow key on the keyboard doesn’t require much effort, especially if it’s at random intervals.
Sleep beckoned. I let out a yawn, sucking in as much oxygen as I could to replenish my depleted reserves. Didn’t help. Shut my laptop, changed my clothes, and like a forklift just picked up all the books, magazines, potato chips, and scribbled-on newspapers to plonk on the other bed. Removed the (standard Fabindia) bed cover, straightened my (pristine white) bed sheet, unwrapped my (Fabindia [!]) blanket and slipped right in.
Note to Self: Find replacement for Fabindia.
Wait a second. What? Umm, I have a question. I got up. The lights were off but I could hear the TV – the ending scene of Matrix Revolutions. Really, I have a question:
We use the Purchasing Power Parity (PPP) to compare the price of products in different countries. What about products that are common across countries? Airplane flight tickets, for example.
You Think of This Shit at Night?
Yes.
Seriously, I think I have a valid question. First things first, lets define “Purchasing Power Parity (PPP)”. (Incidentally, there are at least 13 political parties across the world with the abbreviation PPP). From WiseGeek:
The Purchasing Power Parity is an economic technique used when attempting to determine the relative values of two currencies.
The Purchasing Power equates different currencies by comparing how much of a common basket of goods they can purchase. If a basket of goods costing $100 in the US costs Rs. 1600 in India, you get a more realistic comparison of currencies than the market exchange rate you see everyday on NDTV Profit. (Do note that I’m not denying there are serious flaws in this method).
So What About Airplane Flights?
Comparing domestic flights is no fun. It’s as good as comparing the cost of coffee, or the Big Mac Burger at different McDonald’s outlets around the world (More info at The Economist).
What’s bothering me is the international flight segment. Let’s look at a single sector: New Delhi, India to San Francisco, US. Will it cost me the same if I book a return journey from either country?
Booking From India
I’m looking at a British Airways flight from New Delhi, India (DEL) to San Francisco, US (SFO) with one stop-over at London’s Heathrow Airport (LHR). I’ve fixed my imaginary travel dates to depart from DEL on the 6th of December, 2010, and departing from SFO on 13th December, 2010.
From MakeMyTrip.com, this will cost me Rs. 60,499. (Only).
Booking From US
Now I’m looking at a similar travel plan, except that I would depart from the US first. I will still look at the same London stop-over, the same travel dates, and the same airline to provide some fairness in comparison.
Masking myself as a visitor from the US, BA.com sells me the flight tickets for $1,523.71. (Only).
Comparison
I’m going to compare this on two levels: one, a simple conversion based on current market exchange rates, and second, a comparison on the affordability of these tickets vis-a-vis your salary.
Converting both figures to Rupees, and using a currency conversion rate of USD to INR = 46.2*, we get the following:
| Real Value | Converted to INR | |
|---|---|---|
| Booking From India | Rs. 60,499 | Rs. 60,499 |
| Booking From US | $1,523.71 | Rs. 70, 395 |
(* – USD to INR conversion rate as of 17th October, 2010 is 44.2050 (Yahoo! Finance India). I’m adding Rs. 2 as most brokers do.)
That’s fairly similar, if you ask me. So on absolute terms, we can say that flight tickets from both sides cost the same. It’s understandable too, as the biggest cost an airline incurs, that of the aircraft itself, will be the same as its produced in one place only.
The Pinchability Comparison
Let’s make things more interesting. We know those tickets cost the same, in absolute terms, but do they pinch the same amount?
Pinchability (may I take credit for this term?) is thus the ratio of expenditure due to something to the annual income earned. If I earn peanuts, then that Rs. 3-lakh Breitling wrist-watch will blow my brains out. High pinchability. On the other hand, if I’m Suresh Kalmadi, then it’s probably peanuts to me. Low pinchability.
It’s difficult to compare incomes across countries. The top job in one country may not be the top job in another. So let’s resort to something that has the same pinchability. [Do note that this makes the whole argument a bunch of assumptions. This is a blog. Get used to it.]
Let’s take coffee! It inspired the name of this blog, after all. So a ‘Small’ Cafe Latte at Costa Coffee is Rs. 75 near my house. A Starbucks ‘Tall’ Cafe Latte costs around $2.70 (at the cheapest, I think). Equating Rs. 75 = $2.70, we get:
USD-to-INR = 27.77
On that basis, we look at our comparison chart again:
| Real Value | Converted to INR | |
|---|---|---|
| Booking From India | Rs. 60,499 | Rs. 60,499 |
| Booking From US | $1,523.71 | Rs. 42,325 |
Look At That!
Spending $1523 with a dollar salary is approximately similar to spending Rs. 42,325 with an Indian salary. That means we Indians have to shell out more money (Rs 18,000 more) for the same travel tickets (or more Cafe Lattes!).
As expected, this result is unfair for Indians. If we travel to the US, we’re getting a 3-star experience for spending like a 5-star hotshot. And those 3-star budget American travelers get to spend a 5-star life in Kerala.
So what do we Indians do? Find a country that’s still cheaper than us, that’s what!
I guess I’ll have a sound sleep today.
Maalik, Economics in itself is based on assumptions. It cant really predict, but attempts to explain what has happened, and in order to facilitate that, it uses a lot of assumptions. At least thats what I thought when I studied these subjects.
Purchasing Power Parity is definitely a better method to understand the value of one currency over the other, but there is still enough ambiguity to make it unreliable and confusing, which allows the economists to make money off it.
It does make sense to go for a country thats cheaper than ours. No wonder Indians feel like kings when they visit Nepal.
Economics is the shiyt. Sometimes I think the PPP is just pricing a barter system. How many wooden clubs do you want for one bale of hay? It depends on how important each item is to you.
Having said that, when are we planning a trip to Nepal? Hehe!
A Harley Davidson bike that costs $14K in the US sells for Rs 34 lakhs, I think. Why? For the sake of exclusivity. What does that say about us? Dunno but surely something must be said about the if-tis-expensive-it-must-be-good syndrome that plagues us.
Really? Damn!
Vaise, I’ve never quite understood how luxury products are priced! What makes a Rado watch worth thaaaat much? Not the production cost. Nope.
Hmm.
“You Think of This Shit at Night? ”
Probably because you do not have people around who can dissuade you from pursuing such untimely thoughts.
And, as has already been pointed out, even ‘pinchability’ can swing wildly depending upon the item you choose (If the prices are grossly mismatched across countries, possibly due to trade restrictions etc).
I heard of your great successes in giving feedback to improve Government’s websites! Awesome work there, my man!
Also, pinchability should not be restricted to one product, but a basket of goods. Having said that, we still can’t completely eliminate your point that, across countries, prices are grossly mismatched!
Smiley Face.
You would have made an excellent (and an extremely popular) teacher.
Never knew PPP could sound this interesting. And am looking for an alternative to FabIndia too. You should try Anokhi now.
Haha! Good sense of humour, I say!
Shall definitely move out of the Fabindia syndrome; Anokhi, here I come!
What logic! What logic… Newton discovered law of gravity while resting under an apple tree and you figured out the Pinchability & PPP theory while resting as well!!
But explain this– if an airplane ticket ( Del-Mum-Del) costs me Rs. 7000 (only) and if I choose to take a holiday in Malaysia I get a ticket for Rs.4000(only) (Air Asia was recently offering this fare).. Staying there in a 3 star hotel will be equivalent to our 5 star and shopping too is more reasonable…so now if India turns out to be an expensive destination when I spend in my own currency while another country is offering me a better experience then obviously I will choose the latter.
Another example if I have understood this pinchability & PPP theory correct – I went to a Swatch store in Delhi and no watch was less than 10 K. I got one from the latest collection in Swtizerland for only 6 K- so it turned out that buying an international brand over seas is cheaper and you get the latest too
…
BTW K & Purba have you both checked out this brand called ‘Soma’? They have a few stores in Delhi & NCR.. Very good stuff as you get at Anokhi & Fab but I feel they are priced more reasonably
You know, you’re right! There are problems with PPP though. Some goods and services might be more expensive in another country, but another bunch of goods and services could be cheaper. Essentially, you will club it “expensive” or “cheap” on the basis of which goods and services you use!
For someone who cares only about shopping for ultra-luxury goods, Malaysia may be “expensive” instead. (I’m just saying this as an example, I have no idea myself!). Or say you really don’t care if fertilizers are cheap or not in Malaysia, unless you happen to own some farmland.
Figuring out this “bucket of goods and services” that is applicable to most people is very very difficult!
BTW, Pinchability is my own term – it doesn’t exist in the real world! Hehe!
Oh and I will check out Soma. I need new bed covers