Purchasing Power Parity
|1.2.||The aim of the paper||3|
|1.3.||Course paper tasks||3|
|1.4.||Structure of the paper||3|
|2.1.||Purchasing Power Parity defined||4|
|2.2.||PPP and PPP rate theories||5|
|2.3.||Common used methods to determine PPP rates||7|
|2.4.||Calculating GDP using PPP||8|
|3.2.||Comparison of PPP of European countries||12|
There are many approaches to comparing country welfare levels and though purchasing power parity lets one to compare the levels with greatest precision, this approach has its drawbacks, like finding identical commodity bundle for all countries so they can be compared with the same products and in the same way. Big Mac and iPod index helps a bit, but in some countries, for example, Big Mac is more expensive than eating in a local restaurant, which makes different attitude to it and therefore gives imprecise results.
Purchasing power parity not only helps to determine welfare level of country, it also helps, at least theoretically to determine whether country has surplus or deficit of the balance of trade, just by identifying if country`s currency is overvalued or undervalued.
The PPP values are used by OECD and helping the organisation to compare level of economic development of possible members.
When using PPP approach, one must use only reliable and precise information and numbers, because even slight difference can cause serious mistakes in final results. Befor applying this method, one should get acquainted with the theoretical parts of purchasing power parity.
Though PPP is the most precise method to determining the level of welfare of the country, GDP per capita approach can be used, because, as I concluded while making this work, the situation of welfare levels does not change dramatically, when applying PPP method. So for just your interest, you can use GDP per capita measures.
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