Busting the Myth - Purchasing Power Parity in the...

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Unformatted text preview: Purchasing Power Parity in the International Auto Trade International Auto Price Differentials General Premise Can a high end European auto buyer get a better price in another country? Is the price differential big enough to pay for a trip over to make the purchase? Does PPP hold? Are prices different after exchange rate changes? What makes the prices different in various countries? The Autos Porsche 911 Carrera BMW 325i BMW 525i BMW 650i BMW 750i Mercedes C class Mercedes E class Mercedes S class These Autos were chosen due to their worldwide popularity and the fact that their prices are high enough to justify a high price differential. The Countries USA Italy England Germany Italy France These countries were chosen due to their developed Auto industries as well as their tourism industry. Purchasing Power Parity If PPP holds then consumers in one country should be able to purchase an automobile for the same price as consumers in another country. Prices might vary for shipping charges and tariffs. Since an auto is a tradable good then PPP should hold internationally. The Prices Manf. Auto USA US Dollar GERMANY Euro France Euro Italy Euro Canada Canadian Dollar England GBP Mercedes Mercedes Mercedes Porsche BMW BMW BMW BMW C class E class S class 911 Carrera 325i 525i 650i 750i $29,975.00 $50,825.00 $86,175.00 $71,300.00 $30,900.00 $43,500.00 $71,800.00 $71,800.00 32,153.00 51,987.00 89,615.00 76,741.00 34,523.00 43,587.00 84,385.00 84,876.00 33,182.00 52,364.00 90,568.00 79,885.00 34,897.00 43,978.00 85,867.00 86,345.00 33,454.00 53,467.00 91,353.00 80,048.00 35,800.00 43,100.00 85,800.00 86,500.00 $34,832.00 $57,385.00 $98,342.00 $104,300.00 $40,300.00 $58,600.00 $101,500.00 $101,200.00 21,985.00 27,050.00 56,765.00 59,070.00 25,840.00 29,085.00 53,020.00 61,045.00 Spot FOREX rates March 31, 2006 Historical Spot Rates 2.000 1.900 1.800 1.700 1.600 1.500 1.400 1.300 1.200 1.100 1.000 1/10/2005 3/10/2005 5/10/2005 7/10/2005 11/10/2005 3/10/2006 9/10/2005 1/10/2006 EURO CANADA BRITAIN EURO 1.2132 GBP 1.7448 Canadian $ 1.1628 FC/US Weak Dollar The Dollar is weak right now in comparison to the Euro and other currencies. This could affect the prices of vehicles imported and exported to and from the United States. Prices in US$ Based on Spot FOREX 3/31/06 Manf. Auto USA GERMANY France Italy Canada England Mercedes C class $29,975.00 $39,008.02 $40,256.40 $40,586.39 $40,502.65 $38,359.43 Mercedes E class $50,825.00 $63,070.63 $63,528.00 $64,866.16 $66,727.28 $47,196.84 Mercedes S class $86,175.00 $108,720.92 $109,877.10 $110,829.46 $114,352.08 $99,043.57 Porsche 911 carrera $71,300.00 $93,102.18 $96,916.48 $97,114.23 $121,280.04 $103,065.34 BMW 325i $30,900.00 $41,883.30 $42,337.04 $43,432.56 $46,860.84 $45,085.63 BMW 525i $43,500.00 $52,879.75 $53,354.11 $52,288.92 $68,140.08 $50,747.51 BMW 650i $71,800.00 $102,375.88 $104,173.84 $104,092.56 $118,024.20 $92,509.30 BMW 750i $71,800.00 $102,971.56 $104,753.75 $104,941.80 $117,675.36 $106,511.32 % Premium Paid in US$ Manf. Auto GERMANY France Italy Canada England Euro Euro Euro Canadian Dollar GBP Mercedes Mercedes Mercedes Porsche BMW BMW BMW BMW C class E class S class 911 carrera 325i 525i 650i 750i 30.14% 24.09% 26.16% 30.58% 35.54% 21.56% 42.58% 43.41% 34.30% 24.99% 27.50% 35.93% 37.01% 22.65% 45.09% 45.90% 35.40% 27.63% 28.61% 36.21% 40.56% 20.20% 44.98% 46.16% 35.12% 31.29% 32.70% 70.10% 51.65% 56.64% 64.38% 63.89% 27.97% -7.14% 14.93% 44.55% 45.91% 16.66% 28.84% 48.34% Travel, Hotel and Shipping. From respective Country to US Canada: ~$1,500 Italy: ~$3,200 France: ~$3,000 Germany: ~$3,000 England: ~$2,900 Price Differentials Very large differences Not largely effected by Tariffs and shipping costs due to free trade agreements. Differences are caused by Supply and Demand equilibriums of each country. Supply and Demand Equilibrium Price Automobile prices are based upon the supply and demand in the respective country's domestic market. If the Canadian market is willing to pay an extra $50,000 then the Auto manufacturers will charge this amount. Purchasing Power Parity does not hold. Why is the US so cheap? Saturated market: The US has a very large and saturated domestic Auto market. This causes foreign imports to have to lower prices to compete with domestic brands. Weak currency: The US currency is weak and Foreign Auto manufacturers must lower prices to make the vehicles more competitive. US Market The combination of the competitive US domestic market and the weak US $ causes foreign imports to have to lower prices to artificially low levels. US Domestic Auto manufacturers are not greatly affected by the weak US $ like BMW, Porsche, and Mercedes. Conclusion Great time to buy a car in the US! Citizens of many countries can come to the US and have a free vacation and save a lot of money on their Auto. US citizens can make money by legally exporting Auto to other countries such as Canada and Germany. ...
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