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Range
Range and quality of goods
The goods that the currency has the "power" to purchase are a basket of goods of
different types:
Local, non-tradable goods and services (like electric power) that are produced
and sold domestically.
Tradable goods such as non-perishable commodities that can be sold on the
international market (e.g. diamonds).
The more a product falls into category 1 the further its price will be from the
currency exchange rate. (Moving towards the PPP exchange rate.) Conversely,
category 2 products tend to trade close to the currency exchange rate. (For more
details of why, see: Penn effect).
More processed and expensive products are likely to be tradable, falling into
the second category, and drifting from the PPP exchange rate to the currency
exchange rate. Even if the PPP "value" of the Chinese currency is five times
stronger than the currency exchange rate, it won't buy five times as much of
internationally traded goods like steel, cars and microchips, but non-traded
goods like housing, services ("haircuts"), and domestically produced rice. The
relative price differential between tradables and non-tradables from high-income
to low-income countries is a consequence of the Balassa-Samuelson effect, and
gives a big cost advantage to labour intensive production of tradable goods in
low income countries (like China), as against high income countries (like
Switzerland). The corporate cost advantage is nothing more sophisticated than
access to cheaper workers, but because the pay of those workers goes further in
low-income countries than high, the relative pay differentials (inter-country)
can be sustained for longer than would be the case otherwise. (This is another
way of saying that the wage rate is based on average local productivity, and
that this is below the per capita productivity that factories selling tradable
goods to international markets can achieve. This is sometimes called
exploitation.) An equivalent cost benefit comes from non-traded goods that can
be sourced locally (nearer the PPP-exchange rate than the nominal exchange rate
in which receipts are paid). These act as a relatively cheaper factor of
production than is available to factories in richer countries.
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