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Forum 3 - Purchasing Power
Parity
International Business (Liberty University)
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Running head: FORUM 3 – Purchasing Power Parity (PPP) 1
BUSI604: Forum 3 – Purchasing Power Parity
(PPP) Brian D. Smith
Liberty University
Dr. John Karaffa
February 22, 2021
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FORUM 3 – Purchasing Power Parity (PPP) 2
Forum 3
Key Term and Why You Are Interested in It
I chose to discuss the term purchasing power parity (PPP). The last topic that I chose to discuss
was the Big Mac Index, which is used to measure a country’s PPP. I find it particularly
interesting to know that one country’s purchasing power is not directly related to the degree or
level of that country’s Gross Domestic Product (GDP), but rather the price of a Big Mac sold in
that country. As I want to transition to the career role of a business manager, knowing and
understanding the aspect of a country’s PPP must be one of my priorities if I wish to be a
successful business manager on the international platform.
Explanation of the Key Term
“One of the foundations of international economics is the theory of purchasing power parity
(PPP), which states that price levels in any two countries should be identical after converting
prices into a common currency”[CITATION Pak03 \p 9 \l 1033 ]. Basically, if you subtract the
trade barriers, costs of tariffs, and taxes, the PPP declares that the product should be traded at the
same or closely similar price in two different countries. As Satterlee (2018) stated, “PPP is a
widely accepted exchange rate theory that states similar goods in different countries should have
the similar process after the conversion of currencies into the same one” (pg. 141). “The PPP is
the theory that is based on the law of one price, which declares that in competitive markets,
identical goods will sell for identical prices when valued in the same currency”[CITATION
Tri15
\p 713 \l 1033 ].
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Major Article Summary
The article that I found interesting was The role of culture and purchasing power parity in
shaping mall-shoppers’ profiles by Shaked Gilboa and Vince Mitchell. The article conducts
research on the mall shoppers and how their culture and economic purchasing power parity
shapes the way they shop and purchase items. The research was conducted help international
mall managers answer important questions “regarding the international expansion of shopping
malls is how each country's shopper behavior is affected by the country's culture and economic
status”[ CITATION Gil20 \l 1033 ]. The article focused its study on four countries: England,
France, Ghana and Morocco. The article identified three mall-shopper profiles: enthusiasts,
which were the most common group of shoppers and described as the mall's best customers
because they enjoy all aspects of the mall and engage in all types of mall activities;
recreationals, also known as “grazers’ due to their preference of going to the mall to spend free
time and experience the mall for leisure and entertainment; and utilitarians, who were described
as your mission shoppers, who go to the mall with a purpose and “shop alone, stay briefly, focus
on planned purchases, and avoid impulsive buying”[ CITATION Gil20 \l 1033 ]. The article
wanted to find the combined impact of culture and purchasing power parity on purchasing
behavior while observing individualism and collectivism. The authors hypothesized that
“countries rated higher on collectivism will have a larger segment of enthusiasts compared to
countries rated higher on individualism”[ CITATION Gil20 \l 1033 ]. Hebrews 13:5 (English
Standard Version) states, “Keep your life free from love of money, and be content with what you
have, for he has said, “I will never leave you nor forsake you.” In conclusion, the study found
that the GDP of a particular country did, actually, influence the type of shopper profile from that
county. For
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instance, the shopper from the country with the higher GDP and PPP tended to spend more and
make more impulse buys than the shopper from a country with a lower PPP. As referenced in the
study, “we found that the impact of culture is more evident in purchasing behavior in rich
countries. However, in poorer countries, purchasing behavior during the trip to the mall is
impacted by shoppers’ economic capacity”[ CITATION Gil20 \l 1033 ].
Discussion
Cited Work Relationship to Major Summary and Assigned
Reading
In assigned reading, Satterlee (2018) explains that the PPP has few limitations because of some
factors that directly involve the international trade and one of those factors included cultural
differences that will impact the demand for products (pg.141). The assigned reading focused on
the government as a major influencer and gate keeper to ensuring the exchange rate market is not
influenced by corrupt parties. However, the article identified a major aspect, that I have never
considered when assessing the exchange rate, and that aspect is culture. The influence of culture
on the PPP of a county is significant. Integration of technology into popular culture are forming
distinct identities based on association with groups of likeminded individuals which is likely to
transcend national borders[ CITATION Cox08 \l 1033 ]. As governments tend to reduce corrupt
influence on the exchange market through regulation, investors are beginning to look more at the
cultural aspect of a country to help identify that country’s PPP.
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Cited Work Relationship to the Other 4 Articles
Each of the cited work used for this discussion focused on the impact that culture has on a
country’s purchasing power parity (PPP). While the other articles used different methodology to
come to it conclusion, each conclusion was very similar in the fact that culture was seen to
impact the PPP. Every article seemed to somehow reject the PPP hypothesis that the GDP does
not or should not have a major effect on the PPP. The other cited works shows the relationship
between how rich or poor a country is and the spending habits of the country, which inevitably
had a profound effect on the PPP. The findings in the other cite works show that one’s country
and their purchasing behavior are affected by some aspect of national culture. Culture and PPP
are correlated and each impact on one another should not be ignored as they both influence each
other significantly.
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References
Cox, J. (2008). Purchasing power parity and cultural convergence: evidence from the global
video game market. Journal of Cultural Economics, 201-214. doi:https://www-
jstor- org.ezproxy.liberty.edu/stable/pdf/41810991.pdf?refreqid=excelsior
%3A82c42011f8b8efdd71097fb86101b854
Gilboa, S., & Mitchell, V. (2020). The role of culture and purchasing power parity in
shaping mall-shoppers' profiles. Journal of Retailing anc Consumer Services, 52.
doi:https://doi.org/10.1016/j.jretconser.2019.101951.
Pakko, M. R., & Pollard, P. S. (2003, November). Burgernomics: A Big Mac Guide to
Purchasing Power Parity.
doi:https://files.stlouisfed.org/files/htdocs/publications/review/03/11/pakko.pdf
Satterlee, B. (2018). Cross Border Commerce. Raleigh: Synergistics International Inc.
Triki, M., & Maktouf, S. (2015). Purchasing power parity as a long-term memory
process:
Evidence from some emerging countries. International Journal of Emerging Markets,
10(4), 711-725. doi:DOI:10.1108/IJoEM-02-2012-0021
