Anyone who has traveled outside of North America has likely noticed that prices can be very different around the world. What are luxuries in some countries are relatively common in others and vice versa. Price is a central mechanism in economics as it represents the place where suppliers and consumers do business, so it is interesting to explore these differences and the factors that shape them. (If you want to take advantage of the increase in consumer prices, check out A Guide To Investing In Consumer Staples.)
TUTORIAL: Economics Basics
Same Foods, Very Different Prices
Food is a good proxy for some of the differences in prices between countries, as everybody eats and an egg is an egg wherever one may roam. While The Economist has long used its Big Mac Index as a means of measuring purchasing power parity (PPP) between countries, the Big Mac is simply one particular food item. It is interesting, then to explore some of the other discrepancies.
Ground beef sells for about $3 a pound in much of the U.S., but nearly $6 in Australia and $11.50 in Taiwan. While the latter makes sense (there aren't large herds of cattle wandering Taiwan), Australia is a bit surprising with its ranching culture. Sticking with fruits of the bovine, milk retails for about $2.25 in the U.S., but only 70 cents in India and a little over a dollar in Brazil and South Africa. Curiously, milk in Hong Kong retails for about $2, while the price in Taiwan is more than twice as high.
Other curiosities include coffee, which goes for well less than $1/lb in Kuwait, about $2/lb in Brazil, but more than $14/lb in South Africa, and eggs which sell for about 40 cents in India, but nearly $5 in Australia.
Just to confuse matters a bit more, take Coca-Cola (NYSE:KO). Coke is arguably every bit as consistent as the Big Mac, but the price (which goes from about $1 to $1.89 in the U.S.) ranges from less than 80 cents in South Africa to more than $3 in Australia.
Drugs, Juice and a Ride
Food is far from the only case where prices can differ radically from country to country. The same three km taxi ride could cost less than $1 in Delhi, India, about $7 in Cape Town, South Africa, $10 in New York City, or $14 in Tokyo, Japan. Likewise, turning on your lights can cost as little as 11 cents per kilowatt hour in the U.S., 17 cents in South Africa, or as much as 30 cents in Germany.
From What to Why
So why should the prices of theoretically identical goods and services be so different from country to country? The economic concept of the law of one price holds that identical goods should have the same price in different markets and the differences should be reflected in the currency exchange rates. In practice, differences clearly exist and those differences show up as differences in relative purchasing power.
Currency and Interest Rates
Certainly it is no surprise that inflation has a major impact on relative price levels, as inflation is often defined as a general increase in prices. Where inflation becomes particularly problematic is in cases where there is unexpected inflation and wages are slow to adjust – that leaves consumers facing bigger outlays at the market, but without the corresponding increase in take-home pay. (To help you deal with the risk of inflation, read Timeless Ways To Protect Yourself From Inflation.)
Generally speaking, countries attempt to manage inflation through interest rates and that in turn affects exchange rates between countries. While the differences in exchange rates are never perfectly explained by interest rates or inflation (exchange rates are based on multi-factor models, as well as investment expectation and speculative interest), they do have a major role. Consider, for instance, that the exchange rate between the U.S. dollar and the Australian dollar has moved from $1.30 to 93 cents in just five years, and that the Aussie dollar / euro exchange rate has moved from 0.60 to 0.75 over that same time period. As a country that imports a lot of its products and has a fierce anti-inflation bias (and the highest interest rates in the developed world), it is not so surprising then that so many goods are expensive in Australia.
Taste and Taxes
Sometimes the discrepancies in price are a little easier to figure out. Land is scarce in Japan (and import standards very high), so expensive beef is not a surprise. Conversely, a lot of arable land in India goes towards lentils and other legumes and the price per pound there is quite low.
Taxation and national policy can also have tremendous influence on the on-the-ground prices of a wide variety of goods. In the case of gasoline, a very large amount of the difference in gas prices between Denmark (where it costs well more than $9 a gallon), the U.K. (well over $8 a gallon) and the U.S. can be found in the extent to which the national governments tax gasoline – the per-gallon (or per-liter, in practice) gasoline taxes in Denmark and the U.K. are both almost 150% higher than the retail price of gasoline in the United States. On the other hand, Saudi Arabia and Venezuela subsidize gasoline for its citizens and gas costs about a dime per gallon in Venezuela.
Along similar lines, Americans pay far more for sugar than the rest of the world because of U.S. government policies and tariffs that artificially raise the price. This discrepancy, in fact, was part of the rise of high fructose corn syrup as companies like Coca-Cola, PepsiCo (NYSE:PEP) and Kraft (NYSE:KFT) found it far cheaper to substitute corn syrup for sugar. Of course, it's not just America that engages in these shenanigans – cars are far more expensive in Vietnam than they need to be because of a sizable import duty.
The Bottom Line
In some cases, international price discrepancies are interesting little quirks to muse over after a trip abroad. In other cases, like the international discrepancies in branded drug prices, they are a matter of serious national interest. In other cases still, it should perhaps prompt a discussion of national priorities and the size of the government's role in the private sector.
Perhaps Denmark has the right idea when it comes to imposing a significant tax burden on drivers so as to recoup the environmental costs of burning gasoline. Or maybe Americans should take more notice of the fact that so many goods are so much more expensive overseas and appreciate the lower overall tax burden they experience. Whatever the case may be, buying power and quality of life are interrelated and while buying more things may not make people happier in the long run, the cost of everyday necessities can be an issue of political and economic stability in many countries. (For a better idea on the effect of tariffs and trade barriers, read The Basics Of Tariffs And Trade Barriers.)