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Purchasing Power Parity: The Russian Ruble vs. The American Dollar

The Russian Ruble vs. The American Dollar
There is a commonly understood equation that all world travelers parse out during their adventures to foreign countries: “How much will (x) of my currency buy (y) of their currency?” If an American travels to any of the 27 European nations, they will need to exchange a large portion of U.S. dollars into the EU’s respective currency, the Euro (€). Similarly, if Russians travel to the United States, they will need to buy American dollars ($) with their Russian Rubles (₽).

Purchasing Power Parity

The relative worth of one holder’s currency pegged to another’s in consideration of the purchase of the same basket of goods and services is referred to among economists as the purchasing power parity (PPP). The parity is a theory that suggests “exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries” (University of British Colombia School of Business).

The basis of PPP is the law of one price across nations; however, in the world of global economies and integrated wealth and trade, $10 spent in Russia gets one more goods and services than $10 spent in the United States. This is the economic disparity that leaves Russian consumers worse off in both their own country and the U.S.A.

Experimental Practicality

In order to better understand the purchasing power parity and how it adversely affects the Russian middle class, the following example will better illustrate its practicality:

Consider the two experimental countries, Russia and the U.S. A tall-sized latte from Starbucks costs approximately 255 ₽ or an American equivalent of $4.50; however, in the U.S., an identical product costs $2.95. The PPP between Russian and the U.S.A. for a tall-sized latte from Starbucks is the price paid in Russia in U.S. dollars ($4.50) divided by the price paid in the United States in U.S. dollars ($2.95).

Simple arithmetic leads to the conclusion that for this item, the PPP between Russia and the U.S. is approximately 1.52, which means the consumers pay $1.52 to make a purchase in Russia that would cost $1.00 in the United States. Alternatively, Russian consumers are using their weaker national currency to pay a 50 percent premium on a tall-sized latte from Starbucks. Apply this to the purchase of a flat, college education or vehicle, and the numbers and basic economic principle alone illustrates how worse-off the Russian middle class is than that of its western counterpart.

Poverty in Russia

The PPP between Russia and the U.S. and any other first-world country is relevant to the overarching issue of poverty in Russia because of relative wealth distribution and purchasing power. Russia’s geography necessitates a strong import business relationship with the world’s leading trading partners, including and especially the United States where embargoes do not apply. For Russian consumers, this means higher prices for finished goods and services that are not justifiably priced in the Russian Ruble (₽).

When Russian consumers want to spend on big-ticket items, they have to work harder and longer, save more and manage their money better than consumers in the U.S. Economics and the PPP explain why Russians often work abroad and repatriate foreign currencies with higher PPP than the Ruble so to afford goods and services in Russia. This consumption strategy tightens the labor market for Russians; however, in the long run, this is not an economically viable alternative to internal market corrections.

Creating Middle-Class Improvement

How can the rest of the world equal the playing field for Russia? The answer is difficult. First, the law of incentives must be prioritized in Russia’s labor environment to keep skilled and unskilled labor in Russia and reduce currency repatriation. Secondly, Russia needs to begin to play by the rules set by developing countries if the country wants to reduce its PPP relative to trade nations. Last but not least, these prior measures will work to benefit Russian importers, businesses, and most importantly, Russian consumers. It is time to bring more power back to the Russian Ruble for the middle class of Russia.

– Nicholas Maldarelli
Photo: Flickr

Increasing Access to Education in Chad

Increasing-Access-to-Education-in-Chad
Located in Central Africa, Chad is ranked near the bottom of the United Nations Development Programme’s (UNDP) Human Development Index, 184th out of the 187 countries studied. Heavily affected by internal conflict and economic strife, Chad’s fragile government has experienced incredible difficulty in increasing access to primary education.

Due to severe economic disparities, there are a number of problems in Chad’s education sector, particularly in a lack of adequate supplies and tools necessary to create a functioning school environment. Many of the existing schools are simply structured, overcrowded with students, and understaffed, also lacking desks, chairs, or textbooks.

In 2012, the United Nation’s Human Development Reports revealed that only 62 percent of primary school educators in Chad were even qualified to teach. Additionally, the youth literacy rate for boys, ages 15-24, was 53.6 percent in 2012, while girls lagged behind with a literacy rate of only 42.2 percent. However, these numbers are an improvement from the past decade.

Chad’s government recently teamed up with an existing triple partnership between the United Nations International Children’s Emergency Fund (UNICEF), the Global Partnership for Education (GPE), and Educate a Child (EAC), with the intention of ameliorating its education problem.

The plan for development involves two main components: restoring and improving the physical learning environment, and increasing the quality of instruction through providing necessary materials (textbooks, blackboards, desks, etc.).

EAC’s website states, “The Revitalizing Basic Education in Chad project works in targeted primary schools in the regions of Guéra, Ouadai, Sila and Logone Occidental, to supports the Government of Chad’s efforts to increase primary school completion rates from 37 percent in 2011 to 80 percent in 2020.”

GPE alone has donated $47.2 million to aid the project, providing ample funds to revamp schools across the country.

With the combined effort of these three organizations, 246,500 children will be able to enroll in and complete a quality primary education.

According to GPE, “Chad’s education sector has progressed slightly in recent years. The percentage of out-of-school children decreased from 43 percent in 2002 to 36 percent in 2011. The primary completion rate increased from 30 percent in 2006 to 35% in 2012. In terms of gender parity, 62 girls finished primary school for every 100 boys in 2012, improving slightly from 53 girls for every 100 boys in 2006.”

Not only is this partnership working in Chad, but also Comoros, Democratic Republic of Congo, Somalia, South Sudan, Sudan, and Yemen, where it is getting 2.5 million children a quality education. If Chad’s current success is magnified, the lives of hundreds of thousands of children will be changed for the better.

– Hanna Darroll

Sources: UNICEF 1, UNICEF 2, Global Partnership for Education, Educate a Child
Photo: Relief Web

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Economic Inequality in Brazil

economic Inequality
As the curtain of the World Cup comes down, the fever and enthusiasm for soccer are going to be put aside for a while. In addition to hosting a seemingly successful World Cup, Brazil is facing numerous social issues such as economic inequality.

Brazil has one of the highest Gini Coefficients, which indicates how unequal the nation’s social distribution is. The richest 10 percent of population is controlling 42.7 percent of the wealth, while the poorest 34 percent own only 1.2 percent. According to the figures of IBGE (Brazil’s government statistics bureau), approximately 16.2 million people (8.5 percent of the country’s population) live under around $1.30 per day.

The disparities are too obvious to ignore. People can feel the inequality right away by standing in front of the expensive beachfront apartments, with favelas (a Portuguese term for a slum) next to these displays of wealth. “Paradise for the rich” has become one of the nicknames for Brazil. To eradicate this social problem, the government has come out with the Brazil Without Misery program.

The central part of the program is the Bolsa Familia cash transfer program started in 2003, which gives low-income families cash from $15 to $95 per month according to per capita income. In return, the families promise to send their children to local schools.

The second step of the program is to put more people under the protection of healthcare and the benefits of public infrastructure. Third, the Busca Activa (or “active search”) aims to help the poorest who are isolated due to geological reasons or lack of information. The Busca Activa has registered 678,000 families who were previously unnoticed.

The Brazil Without Misery program aims to eradicate poverty by 2014. It is the middle of July, but there are still millions of people remaining homeless, living in slums and under the poverty line. Problems such as corruption still riddle the country.

In 2013, Pope Francis visited the slums in Brazil, scolding the rich and corrupted who put themselves before the people. Just like he said, a “culture of solidarity” should replace “selfishness and individualism.” Clearly, there is still a long road ahead if Brazil is to solve its issues of inequality.

– Jing Xu

Sources: Chaurahha, Reuters, The Rio Times
Photo: Insight Guides