22.40 ndian onom
(i) One could confess and agree to testify price-cutting, firstly the rivals are ousted from the
against the other as a state witness, market and later the consumers are exploited as
receiving a light sentence while his fellow monopolistic suppliers by the firm.
prisoner receives a heavy sentence.
(ii) They can both say nothing and may turn ppp
out to be lucky getting light sentences or
Purchasing power parity (PPP) is a method of
even be let off due to lack of firm evidence.
calculating the correct/real value of a currency
(iii) They may both confess and get lighter which may be different from the market exchange
individual sentences than one would rate of the currency. Using this method economies
have received had he said nothing and the
may be studied comparatively in a common
other had testified against him.
currency. This is a very popular method handy
The second outcome looks the best for both for the IMF and WB (introduced by them in
the prisoners. However, the risk that the other 1990) in studying the living standards of people
might confess and turn state witness is likely to in different economies. The PPP gives a different
encourage both to confess, landing both with exchange rate for a currency which may be made
sentences that they might have avoided had they the basis for measuring the national income of
been able to co-operate by remaining silent. the economies. It is on this basis that the value of
In reality, firms behave like these prisoners, gross national product (GNP) of India becomes
not setting prices as high as they could do if they the fourth largest in the world (after the US,
only trusted the other firms not to undercut them. Japan, and China) though on the basis of market
Ultimately, the firms are worse off i.e. all firms exchange rate of rupee, it stands at the thirteenth
The concept of the PPP was developed by the
populAtion trAp great European conservative economist, Gustav
A situation of population growth rate greater Cassel (1866–1944), belonging to Sweden. This
than the achievable economic growth rate. This concept works on the assumption that markets
makes it difficult to alleviate poverty;–government work on the law of one price, i.e., identical goods
is suggested to implement population control and services (in quantity as well as quality) must
measures. have the same price in different markets when
measured in a common currency. If this is not the
poverty trAp case it means that the purchasing power of the two
currencies is different.
A situation where an unemployed getting
Let us look at an example. Suppose that sugar is
unemployment allowance is not encouraged to
selling $1 in US and Rs. 20 in India a kilo then the
seek work/employment because his/her after-tax
PPP-based exchange rate of rupee will be $1 = Rs.
earnings as employed is less than the benefits as
20. This is the way how The Economist of London
unemployed, also known as the unemployment
has prepared its ‘Big Mac Index’ (comparing the
Mc Donald’s Big Mac burger prices in different
In theory, the value of currencies in terms of
The pricing policy of a firm with the express purpose their market exchange rate should converge with
of harming rivals or exploiting the consumer. By their value in terms of the PPP in the long run.