Purchasing Power Analysis; Living Expense in Us and China (Research Paper Sample)

Purchasing Power Analysis; Living Expense in Us and China
Name
Course Details
Instructor
Date
Abstract.
The dynamics of economic conditions in different countries have seen most college students combine their studies with part time jobs. This has created a disposable income for this group of people and has provided them with an opportunity to purchase different products and services to either support their studies or their general life. This change in purchasing power among college students and youths aged between 18 and 29 has been witnessed in the United States of America as well as China. The theory of purchasing power parity better explains how market forces in various countries determine the adjustment of currencies in terms of exchange rates. Although there are adjustment of exchange rates between different currencies, the purchasing power of one country can still be qualitatively or qualitatively overvalued or undervalued in relation to another CITATION Cox15 \l 1033 (Cox, 2015). The main objective of the report is analyze the purchasing power of the US dollar and Chinese Yuan based on the living expense of those countries. This shall be achieved by evaluating the spending patterns of a given age group in these two countries.
Table of Contents TOC \o "1-3" \h \z \u Abstract. PAGEREF _Toc512470790 \h 2Introduction PAGEREF _Toc512470791 \h 3Literature Review. PAGEREF _Toc512470792 \h 4Methodology. PAGEREF _Toc512470793 \h 6Results PAGEREF _Toc512470794 \h 6Analysis PAGEREF _Toc512470795 \h 10Degree of government’s intervention in exchange rate PAGEREF _Toc512470796 \h 10Level of economic development PAGEREF _Toc512470797 \h 11The Prices PAGEREF _Toc512470798 \h 12Wages and Employment PAGEREF _Toc512470799 \h 12The demand and participation degree of International trade. PAGEREF _Toc512470800 \h 13Conclusion PAGEREF _Toc512470801 \h 13
Purchasing Power Analysis Living Expense in US and China
Introduction
The cost of living in the world has gradually increases over the last decades. Most Consumers are purchasing commodities and services at prices that are relatively higher than they were ten or twenty years ago. This rise in living expenses has basically affected the purchasing power of all countries including some of the world’s economic super power like China and the United States. However, there are countries whose purchasing power have been largely affected by the cost of living than others. To better understand this concept, this report shall analyze the living expenses in the United States and China by comparing the purchasing power of the US dollar and Chinese Yuan.
Purchasing power of various currencies can be analyzed comprehensively using the Purchasing Power Parity Index (PPP). PPP index is a very useful benchmark for measuring the relative fair value of different currencies across the world. The theory of purchasing power parity better explains how market forces in various countries determine the adjustment of currencies in terms of exchange rates. Although there are adjustment of exchange rates between different currencies, the purchasing power of one country can still be qualitatively or qualitatively overvalued or undervalued in relation to another CITATION Cox15 \l 1033 (Cox, 2015).
Objectives.
The main objective of the report is analyze the purchasing power of the US dollar and Chinese Yuan based on the living expense of those countries. This shall be achieved by evaluating the spending patterns of a given age group in these two countries. The age group under consideration in this case is youth adults (Mostly College students) where comparison shall be made on the type of products and services that they purchase. The overall purpose for the report is to determine which country among the two has the least living expenses and the implication of such expenses to their respective currencies.
Literature Review.
The big Mac Index was invented to guide economist in determining whether countries are at their “correct level.” This index module is based on the purchasing power parity theory which states that exchange rates need to move towards the rate which will equalize the prices or values of identical basket of goods in two countries. For instant, in January 2018 the price of a burger in the US was $ 5.28 while in china the same burger cost $ 3.17 at the prevailing exchange rates. This therefore mean that the value of the Chinese Yuan was undervalued during this time. According to Hurron & Linda (2018), the best method of analyzing the purchasing power parity in two countries is by comparing the price of indentical commodities to determine whether they are under valued or overvalued. This can be done by focusing on a particular set of consumers who can be categorized by their age group. The youths are normally the best focus since they make up majority of the population in most countries.
The dynamics of economic conditions in different countries have seen most college students combine their studies with part time jobs. This has created a disposable income for this group of people and has provided them with an opportunity to purchase different products and services to either support their studies or their general life. This change in purchasing power among college students and youths aged between 18 and 29 has been witnessed in the United States of America as well as China. Most of college students’ expenses are still focused on food. According to Caron (2011), over $ 11 billion was spent on bevarages and snacks last year alone in the United states of America. Next to food is technology. Most college student in the United States tend to spend more on electronic products such as phones, laptops and tablets so as to keep up with the technoogical trend. This nature of expendure is also true for college students in other countries such as China.
Statistics have indicated that United States college students tend to spend more on the above mentioned products and service in comparison to their chinese counterparts. Although the nature of goods and services among college students in china and United States is the same, there is a significant difference between the amount that is spend on these goods and services by the students. According to Caron (2011), the high rate of spending habits in the United states has strengthened the dollar in relation to the Chinese Yuang.
Statistics have futher indicated that china has cheaper products compared to the United States of America. This can be attributed to the cheaper cost of production of goods due to the cheap cost of labor. Due to high prices of goods and services in the United States when compared to china, the US dollar is generally overvalued in relation to the China Yuan when the theory of Purchasing power parity is employed in this case.
Methodology.
This report shall use the purchasing power Parity principle to make a comparison between the Chinese Yuan and US dollar. The purchasing power comparison shall be done on the spending patterns of college students. Basket of the same goods and services consumed by college students in the two countries shall be collected and their prices compared. The next step will be to find out the broad category of products consumed by this age group and the prices of these products in the US and China. From the information gathered we shall calculate the Yuan/Dollar price ratio and the Yuan undervalued (%) against the dollar. An analysis will then be made to compare the living expense between china and the United States of America.
The data shall be obtained from various web sources with information relating to the prices of the products and services that are being compared. The research shall also include visiting college store and interviewing some student to get the information that will be useful in the analysis of the living expenses between these two countries. At the end, we shall determine the spending habits affect the living expenses and currencies in the two countries.
Results
Product Price Information Comparison
These data presents a comparison of various categories of products consumed by college students in the Unites states and China.
Broad Category

Product

Source of information in the US

Price in the USD

Source of information in China

Price In the Yuan

Yuan/Dollar Price

Yuan Under valued or over valued

Food

Burger

%2Fmcdonalds%2F&usg=AOvVaw3E0E_s6MxKXA3tAeHaaELN

$ 6

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

24.05

4

undervalued


Coffee cappucino

%2Fmccafe-new-gourmet-coffee-mcdonalds-2017-9&usg=AOvVaw1OwycSk6VYXzFujc7_eew9

$ 2.95

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

7.6

2.58

undervalued


Fruits (Apple)

%2Fstatistics%2F236871%2Fretail-price-of-apples-in-the-united-states%2F&usg=AOvVaw0eTDg4m1NE8ImbI6WAOP0i

1.31 per pound

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

5.6

4.27

undervalued


Cucumber

%2Fwebdocs%2FDataFiles%2F51035%2Fcucumbers.xlsx%3Fv%3D42082&usg=AOvVaw2grm4a4CdkkODyZ2mrK8ta

1.31 per pound

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

5.06

3.8

undervalued


Yoghurt

/2011/06/review-mcdonalds-fruit-n-yogurt-parfait.html

1

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

4.54

4.54

undervalued


Coca Cola

%2Fstatistics%2F670909%2Fcoca-cola-average-price-north-america-by-bottle-size%2F&usg=AOvVaw3_r9zqXrAbFx6F5Bsm2Qmv

0.19

%2Fen.html&usg=AOvVaw0MuZzSxbncoHzznxLsS5Ct

2.22

11.68

overvalued

Electronics

Iphone 6
...