Sunday 13th May, 2007


$mall span of control

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Money has been around for thousands of years, originally in the form of silver and gold coins, now in the form of paper, and cheap metal alloys. And plastic cards are still not the medium of choice so people still walk around with money.

However, today the purchasing power of money is not always equal for the different currencies. You could not use TT dollars in any other country. US dollars are almost universally accepted. Using British pounds in some countries is not always easy, and the British store clerk on Oxford Street, London, would prefer not to take euros.

In today’s environment purchasing power parity (PPP) is based on what is called the law of one price. It assumes that the same goods are valued the same regardless of the currency. The idea falls down, however, because the market is not always efficient. But the concept of PPP attempts to calculate the average exchange rate over a long period of time between two currencies that are being compared in terms of the prices for the same goods. This is called absolute purchasing power parity.

Relative purchasing power parity includes the effects of inflation when comparing exchange rates, over the long run. But the comparisons are still problematic.

The confusion becomes greater when GDP per capita—a measure of earnings per head of population, is examined. GDP per capita in China is US$1,800 (Trinidad is US$13,999), but is terms of PPP it is about US$7,200.

PPP is further complicated by the fact that prices do not compare in the same way in each sector. For example in Trinidad, food price inflation is way above the other inflation statistics in other categories of goods and services. PPP proponents have not yet developed an adequate equation to correlate these discrepancies.

Furthermore the basket of goods used to compare PPP and inflation is typically different, as is so obvious if one imagines the basket of goods in China, compared to that in the US. The use of the price index is an attempt to equalise matters on this front.

Money changes value due to diverse factors that change daily. Plus there is so much manipulation outside of supply and demand. Recognise then, that our span of control is but a small circle!

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