Abstract
A shared activity or pursuit can have the effect of bringing about cultural convergence in the form of patterns of behaviour and consumption. This idea is supported by the Axelrod (1997) thesis, which suggests that cultures are more likely to interact and subsequently converge if they have shared traits: one of these being the use of technology. This paper seeks to apply such a cultural perspective to the body of published literature on deviations from the law of one price. Adopting a similar methodology to the popular ‘Big Mac’ index, disparity between official market exchange rate and the real rate of exchange between two currencies is measured using local prices of video game consoles. The results of the study suggest that, while a degree of pricing and cultural convergence across broad geographic areas is observed, many major global currencies are trading at levels that are quite significantly different to that which is suggested by purchasing power parity (PPP) theory.
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Notes
Published by the Commonwealth Bank of Australia.
Published by Joshua Gans, Professor of Management at the Melbourne Business School.
NES is an acronym of ‘Nintendo Entertainment System’.
For a more detailed analysis of the historical development of the video games console market, see Cox (2006).
The theory of purchasing power parity suggests that the value of a typical basket of goods in one country (X) should be able to be converted into the currency of another country (Y) and be able to purchase that same basket of goods. If PPP holds, P(X) * Y/X = P(Y), where P(X) = the price of the basket of goods in Country X, P(Y) is the price of the same bundle of goods in Country Y and Y/X represents the exchange rate between the currencies of the two countries. Rearranged, this becomes Y/X = P(Y)/P(X). PPP does not hold if the two sides of this equation are not equivalent.
As an example, authors such as Darno and Valente (2006) and Wallace and Shelley (2006) find evidence in support of the existence of PPP through the use of samples encompassing observations from periods in excess of 100 years.
This suggests that productivity levels for the production of non-traded goods can differ across countries. If the traded goods sector displays higher levels of productivity than the non-traded goods sector (which is usually the case), it will lead to higher relative prices of non-traded goods relative to those that are traded. This is particularly relevant (and relevant in this case) where final goods contain a non-traded service component.
A chief example of such being the genre of ‘Massively Multiplayer Online Games’ (MMPOGs), which includes the incredibly popular ‘World of Warcraft’.
Ideally, a range of prices across numerous time periods would be used to test for convergence over time. However, due to the relatively static nature of nominal prices for these machines (prices may change perhaps once or twice over the significant lifespan of such a device—usually five years) and a lack of availability of consistently updated prices from the range of countries cited here, it has not been possible to do so. This may be an area for future research effort to expand upon.
These terms are used in the same sense as suggested by the Big Mac Index. In truth, it is expected that official exchange rates will deviate from strict PPP levels to an extent. One should not assume that markets will adjust exchange rates to equalise the prices of individual goods such as video games consoles, hamburgers or any small market baskets.
To convert these values into direct figures, one only needs to take the reciprocal of the numbers presented here—this will inform how many US Dollars can be purchased with one unit of the relevant currency.
Although, in truth, it is unlikely that monetary policy will excessively influence the departure of official exchange rates from PPP levels—as interest rates, exchange rate sand prices are determined simultaneously in general equilibrium.
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Cox, J. Purchasing power parity and cultural convergence: evidence from the global video games market. J Cult Econ 32, 201–214 (2008). https://doi.org/10.1007/s10824-008-9073-z
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DOI: https://doi.org/10.1007/s10824-008-9073-z