Purchasing Power Parity

Often, sitting in India, we wonder how cheap things are in the US or vice versa. Let me give an example. Iphone SE base model costs only $499 in US (source: Amazon ). It costs Rs. 36,000 in India (source: Amazon ). I used to think, you just need $500 to buy an Iphone in US, why does it cost so much in India?

 

The answer, of course, is that $1 does not carry same purchasing power as Rs.1. In simple terms, with $1, you can buy more than you can with Rs. 1. Exactly how much a dollar is worth in Indian rupees is determined dynamically everyday and is known as the Exchange rate. In fact, the exchange rate exists for every pair of currency in the world.

 

The current exchange rate for $1 is Rs. 67. This means that you can give Rs. 67 to a US national in exchange for $1. However, does this mean that the purchasing power of Rs. 67 is same as $1. Yes and No. Yes, because theoretically it is true.

 

No, as the purchasing power of a currency is determined by something known as Purchasing Power Parity (PPP). PPP is defined by World bank as Purchasing power parity conversion factor is the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market as U.S. dollar would buy in the United States. This conversion factor is for GDP.”

 

The latest data for Indian PPP is at 16.98. Therefore, PPP for Indian rupee is about 4 times (=67/16.98) when compared to the US Dollars. This means, if a person earns Rs. 10 lacs per annum in India (or $14,925 in US Dollars), he/she has a purchasing power similar to that of a person earning $59, 701 in the US (4 times 14,925), which is a decent income and would place you in the top 20 income percentile group in the US.

 

The Iphone may not seem as expensive in India,  as an Individual in US is spending approximately $2000 from an Indian point of view to buy the Iphone.

 

Of course, telecom operators deals are not accounted for. Happy Shopping and enjoy your Iphone. i would stick to my Android for now. Its a personal finance website after all and we like to get maximum value for every dollar spent.

About Abhishek 20 Articles
A personal finance enthusiast based in Bangalore, India.

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