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It would compare the price relative to other goods in the same country. It makes sense to me, what am I missing?

by soneca 6y ago

smabie 6y ago
PPP's fundamental assumption is that a product in one place and the same product in another place have the same price. It's used to determine a relative exchange rate, by setting the price of the goods to be equal. Using PPP methodology for GBs of data, we would first assume that all GBs in every country are the same price. We would then use that fact to come up with a conversion rate between currencies. This isn't very helpful for price comparison, since it's very literally assuming that the prices are equal. Working back from the exchange rate makes much more sense, because we are interesting in the cost difference between a GB here and one there. We can't compare the cost difference if we assume a priori that they must equal each other.
- soneca 6y ago
  But if you calculate PPP for a basket of goods instead of exclusively for internet GB, it shows the comparison that I would like to see, doesn’t it? I had the impression that using PPP for a basket of goods is how it is usually used.
  - smabie 6y ago
    PPP is used to talk about money. For example, I could compare salaries in different countries to each other and using PPP might give me a better representation than the exchange. If we try and use it to compare goods not in a basket, it's problematic. Everything in the basket is the same price, but stuff out of the basket is now a different price. It doesn't make logical sense with assumptions PPP has. If you used PPP in that way, you're basically saying that the law of one price holds for only the things in the basket, and not for stuff out of the basket. This fundamental distinction between the things in the basket and out of the basket is artificial and doesn't make sense. After all, we could then drastically change the price of something by just adding or removing it from the basket. What you're after is relative cost of a good, normalized by the wealth of an average buyer. This is a fair point, but PPP doesn't do that for your. PPP gives you relative value of money, using the market price and the law of one price.
    - nl 6y ago
      This is incorrect. PPP is absolutely useful (and often used) to compare prices of goods outside the PPP basket. For example [1] uses PPP to compare things like rent and grocery costs so they can say things like "Rent prices in London are 19% higher than Sydney". [1] https://www.budgetdirect.com.au/interactives/costofliving/compare/sydney-vs-london/ https://www.budgetdirect.com.au/interactives/costofliving/co...
    - soneca 6y ago
      Got it, makes sense, thanks

It would compare the price relative to other goods in the same country. It makes sense to me, what am I missing?

by soneca 6y ago

It would compare the price relative to other goods in the same country. It makes sense to me, what am I missing?

PPP's fundamental assumption is that a product in one place and the same product in another place have the same price. It's used to determine a relative exchange rate, by setting the price of the goods to be equal. Using PPP methodology for GBs of data, we would first assume that all GBs in every country are the same price. We would then use that fact to come up with a conversion rate between currencies. This isn't very helpful for price comparison, since it's very literally assuming that the prices are equal. Working back from the exchange rate makes much more sense, because we are interesting in the cost difference between a GB here and one there. We can't compare the cost difference if we assume a priori that they must equal each other.

soneca 6y ago
But if you calculate PPP for a basket of goods instead of exclusively for internet GB, it shows the comparison that I would like to see, doesn’t it? I had the impression that using PPP for a basket of goods is how it is usually used.
- smabie 6y ago
  PPP is used to talk about money. For example, I could compare salaries in different countries to each other and using PPP might give me a better representation than the exchange. If we try and use it to compare goods not in a basket, it's problematic. Everything in the basket is the same price, but stuff out of the basket is now a different price. It doesn't make logical sense with assumptions PPP has. If you used PPP in that way, you're basically saying that the law of one price holds for only the things in the basket, and not for stuff out of the basket. This fundamental distinction between the things in the basket and out of the basket is artificial and doesn't make sense. After all, we could then drastically change the price of something by just adding or removing it from the basket. What you're after is relative cost of a good, normalized by the wealth of an average buyer. This is a fair point, but PPP doesn't do that for your. PPP gives you relative value of money, using the market price and the law of one price.
  - nl 6y ago
    This is incorrect. PPP is absolutely useful (and often used) to compare prices of goods outside the PPP basket. For example [1] uses PPP to compare things like rent and grocery costs so they can say things like "Rent prices in London are 19% higher than Sydney". [1] https://www.budgetdirect.com.au/interactives/costofliving/compare/sydney-vs-london/ https://www.budgetdirect.com.au/interactives/costofliving/co...
  - soneca 6y ago
    Got it, makes sense, thanks