Saturday, March 18, 2006

Purchasing Power Parity

Many of the labourers in Dubai come from countries where the wages, at market exchange rates, are about €10 a month. When they indenture themselves to come to Dubai, they get around €200 a month. If they get paid. Which they often don't. But, if they do, they seem quite happy with a wage of €200, and send most of it home.

Living on €10 a month would be impossible in Western Europe, but, on the sub-continent, €0.15 will buy an all-you-can-eat meal, and a room can cost as little as €1 per month (of course, it doesn't have a toilet, but it's only €1, so what do you expect).

It was a 16th century Spanish economist who first coined the idea of purchasing power parity, by which he meant that, over time, the price (in gold) of items in different countries should converge. Why anyone would listen to a 16th century Spanish economist when Spain expelled all its best economists at the end of the 15th century is a mystery. (Of course, it's no mystery as to why a country would be happy to expel all its best economists. Economics isn't known as the dismal science for nothing.)

More recently, in the 20th century, the Economist suggested that prices by multiplied by the cost of a Big Mac in London divided by the cost of a local Big Mac. So all Chinese prices (at official exchange rates) get multiplied by 5, and a Chinese salary of £100 per month gets translated into a salary of £500 per month. Still not a lot. But it's easier to understand how a Chinese worker can live on £500 than on £100.

A Big Mac in Dubai costs the same as a Big Mac in London, so prices are assumed to be at parity, and a salary of €200 is really a salary of just €200.

Only one can get the same amount of bread (flat, not a leavened bun), meat (goat, not beef), and vegetables (with extra protein from the occasional worm or beetle on local, insecticide-free veggies) for about 1/5 the cost of a Big Mac. (Cheaper, in fact, than buying the food in a retail grocery: the restaurants get much better deals on food than retail shoppers.)

Tonight, for example, I had a small thali, meaning seconds are allowed, but not thirds, all for about a guinea (or £1.05 for those too young to remember the days before decimalization). It consisted of flat bread, rice, soup, three kinds of vegetables, and two kinds of dessert (tea was an extra half crown). I waddled out of the restaurant. I haven't been in London lately, but I suspect the local vindaloo (with free seconds) costs more than a guinea.

Which is why I advise against following the lead of 16th century Spanish economists.

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