Adjusting Purchasing Power Parity For Economies Of Scale With Examples

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Purchasing power parity (PPP) between advanced economies and emerging economies must reflect economies of scale (EoS) in the emerging economies, because the structure of prices in advanced economies is inclusive of EoS.

The best proxy measure of EoS is the number of personal income tax payers (or #PIT) in any country who are also the consumers.

For any given institutional structure and exchange rate, when #PIT (Emerging economy) is greater than or equal to #PIT (advanced economy),

Price (Emerging Economy) in Advanced Economy Currency Units = Price (Advanced Economy) in Advanced Economy Currency Units/[#PIT (Emerging economy)/#PIT (advanced economy)]

Using the above relationship, the typical price for unlimited voice/data cell phone service in India should be INR 1000 at the current exchange rate of approximately USD 1 = INR 50.

A simple and granular price structure for the consumers can, therefore, be derived, voice measured in minutes (M) of use time and data in Giga-bytes (GB), by assigning INR 500 to unlimited data and INR 500 to unlimited national voice in the total INR 1000 for unlimited voice/data.

The price structure as above will increase the demand for smart phone devices in India while keeping pricing simple for consumers for using a phone device as a pre-paid or a post-paid service within the above structure.


About Chandrashekar (Chandra) Tamirisa
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