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Financial Indicators
Jul. 13th, 2021 01:08 pmThe other day, I told Joel that I was looking forward to getting all my data imported, so that I could see what the heck the difference between purchasing power parity, consumer price index, and cost of living index actually were. They all seem to measure the cost of a basket of goods. However, today, after finally getting the IMF website to let me download the consumer price index data, I discovered the following on the World Bank's website:
"Consumer price indexes should be interpreted with caution. The definition of a household, the basket of goods, and the geographic (urban or rural) and income group coverage of consumer price surveys can vary widely by country. In addition, weights are derived from household expenditure surveys, which, for budgetary reasons, tend to be conducted infrequently in developing countries, impairing comparability over time. Although useful for measuring consumer price inflation within a country, consumer price indexes are of less value in comparing countries."
Well, since we are mainly interested in comparing between countries, that means that the consumer price index isn't useful to me.
Another World Bank webpage has the following info:
"PPPs measure the total amount of goods and services that a single unit of a country's currency can buy in another country. The PPP between countries A and B measures the amount of country A's currency required to purchase a basket of goods and services in country A as compared to the amount of country B's currency to purchase a similar basket of goods and services in country B. PPPs can thus be used to convert the cost of a basket of goods and service into a common currency while eliminating price level differences across countries. In other words, PPPs equalize the purchasing power of currencies.
Suppose that there is a basket of goods and services that costs 50 United States dollars (USD). 50 USD would be equivalent to 363 South African Rand (ZAR) when using a market exchange rate of 7.26. However, due to South Africa's lower price level in relation to the United States, the cost of a similar basket is actually 239 ZAR. Therefore, 50 USD would buy a larger basket of goods and services in South Africa than it would in the United States; the PPP of South Africa to the United States would be 239 ZAR/50 USD, which is equal to 4.77."
As for Cost of Living, Numbeo is where we get that, and they say:
"Cost of Living Index (Excl. Rent) is a relative indicator of consumer goods prices, including groceries, restaurants, transportation and utilities. Cost of Living Index does not include accommodation expenses such as rent or mortgage. If a city has a Cost of Living Index of 120, it means Numbeo has estimated it is 20% more expensive than New York (excluding rent)."
I'm still not really seeing how exactly purchasing power parity and cost of living are related (if they are), but at least, I know what data I don't need.
"Consumer price indexes should be interpreted with caution. The definition of a household, the basket of goods, and the geographic (urban or rural) and income group coverage of consumer price surveys can vary widely by country. In addition, weights are derived from household expenditure surveys, which, for budgetary reasons, tend to be conducted infrequently in developing countries, impairing comparability over time. Although useful for measuring consumer price inflation within a country, consumer price indexes are of less value in comparing countries."
Well, since we are mainly interested in comparing between countries, that means that the consumer price index isn't useful to me.
Another World Bank webpage has the following info:
"PPPs measure the total amount of goods and services that a single unit of a country's currency can buy in another country. The PPP between countries A and B measures the amount of country A's currency required to purchase a basket of goods and services in country A as compared to the amount of country B's currency to purchase a similar basket of goods and services in country B. PPPs can thus be used to convert the cost of a basket of goods and service into a common currency while eliminating price level differences across countries. In other words, PPPs equalize the purchasing power of currencies.
Suppose that there is a basket of goods and services that costs 50 United States dollars (USD). 50 USD would be equivalent to 363 South African Rand (ZAR) when using a market exchange rate of 7.26. However, due to South Africa's lower price level in relation to the United States, the cost of a similar basket is actually 239 ZAR. Therefore, 50 USD would buy a larger basket of goods and services in South Africa than it would in the United States; the PPP of South Africa to the United States would be 239 ZAR/50 USD, which is equal to 4.77."
As for Cost of Living, Numbeo is where we get that, and they say:
"Cost of Living Index (Excl. Rent) is a relative indicator of consumer goods prices, including groceries, restaurants, transportation and utilities. Cost of Living Index does not include accommodation expenses such as rent or mortgage. If a city has a Cost of Living Index of 120, it means Numbeo has estimated it is 20% more expensive than New York (excluding rent)."
I'm still not really seeing how exactly purchasing power parity and cost of living are related (if they are), but at least, I know what data I don't need.
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