The concept of purchasing power parity (PPP) is simple when speaking in definition terms. It simply means that a product’s value in one country holds the same value in another country (Shapiro, 2014). This is due to the currency exchange rates normalizing values among various currencies. That may be true in a perfect world, but multinational corporation (MNC) leaders know that there is far more to the story than a simple currency exchange rate. The relative version of PPP goes beyond realistic costs to include country inflation rates. Knowing the inflation may give an MNC leader a good indication of what currency is losing value faster than another currency.
The question that I was hoping to answer is what use the PPP offers from an MNC perspective. The long answer eluded me, and would most likely develop into far too large of a discussion entry. The short answer appears to be that utilizing the PPP values of similar products among various countries is important when logistically planning supply sources, manufacturing locations, and consumer pricing at retail outlets (StudyCorgi, 2022). The PPP value will also justify pricing negotiations at various points along an MNC’s product supply chain. One of the inherent values indicated in the PPP is the cost of living, which causes the same product to be sold at a different relative price at differing parts of the globe. An example might include comparing the cost of living in Mexico to that of the United States. A typical homeowner in America desires different housing accommodations than a homeowner in Mexico, and along with that comes a demand for a higher wage. This translates to a lower cost of employment within Mexico for an MNC, so that leader will decide to build products there at a reduced expense for employees. Therefore, the PPP assists an MNC with deciding where to expand manufacturing so as to net the largest profit for shareholders.
