Purchasing power parity or “PPP” has for many years been as good a proxy as any for allowing comparability between figures such as different countries’ GDP. China’s economy, for example, has a nominal GDP of just US$12 trillion, compared to America’s US$19.4 trillion. Yet when re-based on PPP, China’s GDP is actually US$23.2, making it the largest in the world. I for one accept that this is a useful indicator of economic strength, in the sense that China as a country is able to mobilise more economic resources than its nominal GDP would strictly suggest, since labour and capital there are cheaper. Likewise, a preferred measure of living standards is that of GDP per capita at PPP, or sometimes (better) average wages at PPP. In this way, some comparability may be afforded which accounts for street food in China appearing so much cheaper than in the West for instance.
Yet a friend of mine recently noted that in a sense, PPP-based comparisons of wages and living standards were very much geared towards the individual. A great leveler, he reckoned (as a relatively new parent complaining about the costs of the endeavor) was the arrival of children into his life. Because whilst in theory a basket of goods for PPP calculation includes items needed for raising children, in reality behavioral differences distort its reality. PPP, he felt, did not reflect the full costs of parenting and its effects seemed most intuitive to a single person. When considering where to live, PPP in his life could and perhaps should be re-adjusted to Parental PPP or “PPPP”.
There are three main buckets to consider in making any such adjustments:
1. Direct additional costs of education
2. Consumption choices
3. Real estate costs
The theory here is as follows: wherever you live in the world, the likelihood is that you will as a parent attempt to make up for the deficiencies of the world around you as best you can, in the interest of your children. This comes out of your own resources, and actually in many countries where life is “cheap”, when it comes to raising children those expenses shoot right up again. For instance, as a single person one may choose to drink tap water; as a parent one begins to invest in water cleansing machinery or bottled water (especially in Asia). Education is an important element too, since although many countries provide free universal education, parents recognize their limitations and will correspondingly pay for tuition and other aid. A surprisingly large selection of countries such China actually see parents effectively paying for education despite it being notionally free – and this is before getting to the issue of boarding schools paid for by expats. Lastly, real estate requirements are different and in some parts of the world rents / price counter-intuitively increase with the size of a property, commanding a premium due to restricted space.
So a comprehensive, scientific adjustment to PPP would require a sophisticated model which includes all these factors. To test it though, I instead looked at a simplistic account using only one factor that I could readily find, HSBC’s analysis of how much parents pay for their children’s education in several countries:
Using this data as a rough proxy for all-in childcare costs (imperfect, but it is all I have to hand) I then readjusted the standard PPP index as provided by the OECD. The assumption I have made is that one-third of a parent’s income is used on children, a figure broadly in-line with statistics also published by the OECD. Thus I left two-thirds of income adjusted on the official OECD PPP basis, whilst the remaining one-third I have adjusted using a new index created by comparing total childcare spend. The results look like this:
Basic and clumsy though this analysis is, it shows some interesting trends. First, as my friend suspected, the “real” living costs for a parent in places like China and India may be in fact higher than initially assumed, due to a surprisingly high need for private spend. But even more notable is how much value is added by the welfare societies of France and the UK, where the median family does not spend anything like as much for education particularly at the tertiary level. Median wages go a lot further in Europe and Canada than in the US under this system – and indeed US$30,000 almost matches the value of US$30,000 in China. The same kind of logic no doubt applies to issues such as universal healthcare. Assuming my calculations are even remotely accurate, life is fundamentally as cheap in Europe as it is in China, whilst life in the US remains the most expensive.
This methodology is very preliminary, full of assumptions and no doubt lacking. I would be happy to hear opinions on how best to improve it. However the basic theory is strong, namely that PPP may have a simple underlying flaw due to not accounting for changes in life cycle; in some cases PPP probably needs to become PPPP to be meaningful for public policy and for investment purposes alike. Essentially, single life remains localised whilst parenthood is becoming globalised. Since parenting costs are only going to increase as we go forward, the issue becomes particularly prominent. PPPP could be the future.
For those keen to see the underlying data, below is the table of calculations: