Saturday, October 6, 2012

Comparative Price Levels

Listed below is OECD comparative price level estimates from August 2012. They are defined as the ratios of purchasing power parity for private final consumption expenditure to exchange rates. They provide measures of differences in price levels between countries. 

Theoretically, If the ratio is above 100 than the currency is overvalued relative to the US dollar and below 100 the currency is undervalued. (Although structural economic reasons can lead to permanent differences eg. minimum wages, geographic size etc.)

Of course, PPP is hardly a reliable indicator for short term currency movements but it conceptually makes sense and I've yet to see a better long term tool. 

Note the many Eurozone countries with vastly different price levels (just one of the Euro's problems). Also, the Swiss franc appears to be benefitting from a flood of investors leaving the Eurozone. Finally, commodity countries like Australia and Canada appear overvalued relative to the US dollar. That's good news for Canadian investors like myself who are unhedged in US dollar investments. 


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