What is purchasing power parity?

Purchasing power parity

The PPP or purchasing power parity is a macro-economic metric that can be used to measure a country’s GDP. The PPP uses a basket of goods approach ie: a set of goods which is bought by these currencies.

The currencies are first converted into dollar value. Then, the amount of dollar value which can buy the same basket of goods in two countries can be calculated.

Eg:

Lets take country A where i-phone is 100$ and another country B where i-phone is 200$, here the purchasing power of country A is double that of the country B with respect to i-phone.

The i-phone is a single product, to have meaningful calculation we add many goods and services eg:- electricity, milk, etc. Now this is called “basket of goods”.

For calculation, the currency of the nations A and B has been converted to common currency ie: dollar. The PPP can show the size of the country’s economy.

What are the criticisms of PPP model?

Let us assume that price of milk was compared between two countries

Country A  1litre = 2 dollar	Country B  I litre = 1 dollar
Milk is good quality, always preserved well, quality and safety tests done	Quality is poor, fluctuating with no quality tests, adulteration high.

Here though, you can buy double quantity of milk in country B, the quality defeats the quantity.

Similarly, Lets imagine B is a big country where a machinery is available at 500$ in city which is added in basket of goods. Now, a far-off villager buy this product from city and take it. The transport cost is high ( no good public transport, no great roads, high local area tax for new machinery etc) then the product costs villagers 700$ (500$ + 200$ transportation). These costs are not included in the PPP calculation.

There may be trade barriers, taxations etc. making goods/services unavailable/costly.

Thus, in-depth analysis are needed for accurate calculations.

Balance of Trade

Balance of Trade

The balance of trade is difference between the value of exports and imports of a country.

ie: A country which imports more goods and services than exports will have deficit of balance of trade.

Why balance of trade is talked about?

When the imports surge without increase in the exports, then it usually is discussed. There is a feeling that it should be balanced and balance of trade should be reduced. 

The govt identifies areas of higher growth, create policies which will drive exports, create right incentives to stimulate that growth.

The balance of trade can be classified as 1) of goods and 2) of services.

View of economists of Balance of trade

Several economists have opined that a growing country will have increase in the deficit. Hence, there is no need to focus on the trade deficit alone.

If the imports are used productively, then the exports will also rise and there will be employment

*Eg:

Company A imported 5 machines at 100 cr which would increase exports of the firm by 5 cr a year. And the machines work for average 30 years with minimal repairs. The machines are employing 3000 employees.

Company B bought imported TVs for all its workers worth 10 Cr and all are seeing TV. The TV decreased the working hours, decreased output of the workers. The exports of country fell by 1 cr in the year.

Imagine that there are 100 A type companies and very 5 B type companies. If the imports are tilted to expenditures more of Company A type functions (the function could be performed by govt, private etc), then employment, exports etc will be improved and nation will prosper. The trade deficit might be more when there are many A type companies but similarly the employment and productivity would be higher. There will be around 3 lakh jobs generated and exports increase per year of 500 cr. 

Imagine, another scenario where there are 100 B type companies and 5 A type companies. The deficit might be lower, but the jobs created and exports generated are lower. 

*Above is a gross simplistic example to focus on the productive use of funds raised.

Hence, I am avoiding the usual coaching centre material which usually classifies balance of trade into favourable, balanced and unfavourable. 

Artic and India - Strategic, Academic, Commercial

Artic and India

Why India is interested in Artic?

Artics have lowest temperatures and are seen to be very important from the climate studies especially with change in global temperatures. The warm artics are associated with change in world wind systems and change in precipitation. This means that the study of artics can give us data for monsoon predictions.

The improved technologies and the ice melt are making it possible to create sea routes from Asia to Europe. This would be a game changer in the economy of the area. Also, there would be minerals, hydrocarbons and other resources there in the artics.

source: www.thermodata.us

India has academic, environmental, scientific, commercial, strategic  interests in the region.

Who does the research there?

 National Centre for Antarctic and Ocean Research (NCAOR), Goa now renamed to National Centre for Polar and Ocean Research (NCPOR), Goa

The NCPOR has a very informative website and the annual reports give a glimpse of the budget spend and outcomes of studies. The professionally run and motivated group of researchers goes to Himadri, Bharathi  (Indian research station in the International station) every year. 

The news and information of the expeditions/missions help Indian know more about the huge importance of  research at poles in day to day life.

Link: http://www.ncaor.gov.in/upload/annualreports/Enghlish.PDF