Differences in taxation may have something do with it, but it can hardly have such a big impact when you compare f.ex. Norway and Bolivia. My guess is that international trade and strength of the currency may have a big impact, but then, what causes this exactly? What causes a waiter’s salary, the price of food and lodging to be so widely different?
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In: Economics
“Purchasing power” is intended as a measure of how much stuff you can actually buy with a currency. There are two sides to this.
This first is very similar to the idea of the cost of living. Renting a small flat in downtown Manhattan is going to be much more expensive than, say, Rusttown, Appalachia. Buying avocados in California is likely to be much cheaper than buying them in Alaska.
Purchasing power is similar. If I exchange my pounds for US dollars I’ll get about $1.4 for each pound. But if I go to California I might find I can get five avocados for a dollar (or 70p), rather than 2 for a pound here. So my money goes further than the exchange rate suggests. Work out the difference for a typical ‘basket of goods’ and you can calculate a purchasing power. (Though there are plenty of problems with this – eg. rich and poor people buy different things, let alone holidaymakers vs residents.)
What causes this difference? A mix of factors, which will have a different impact depending on what it is you’re buying:
* transport costs
* taxes and duties, subsidies and price controls
* market structures (eg. less competitive markets will generally have lower prices)
* wage levels
* property costs.
How some of these are set is pretty complicated to explain – what determines the level of wages in a country is not at all straightforward.
The other side is the exchange rate of currencies. Which is also a topic in itself really. You’re right, though, that it’s strongly influenced by exports/imports, along with things like government support and convertibility. If a country exports more than it imports that will increase demand for their currency, which will usually increase its value against other currencies. My pound buys more dollars so now it has a higher purchasing power in the US.
A currency that’s worth more does also reduce the cost of imports, so a stronger pound will also lower prices here in the UK, but that only affects imports, whereas if I visited the US *everything* would feel cheaper. So if the value of the pound went up vs the dollar, the purchasing power of the pound would go up more in the US than in the UK.
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