St. Petersburg, Day 1 (Part 1): Orientation and Academe

The residency started off as always: an orientation to start, a few hours of class and tons of catching up to do.  To help us ease back into the swing of things, yesterday was an unusually short day; orientation started at 9 a.m. (as opposed to the 8 a.m. usual start), had Global Markets and Institutions class for two hours, then we were done with the academic part of the day at 11:30 a.m.  Even though we were free from the classroom to do whatever we wanted, there was still an assignment to do:  the purchasing comparison exercise.

I’m not sure I’ve ever talked about the purchasing comparison exercise, but the basic premise is that you go around each city and record the prices of various goods such as chocolate, coffee, toothbrush, the buy/sell local currency-to-$USD exchange rate (local rate, not WSJ rate), etc.  The purpose of this exercise is to prove/disprove the concept of purchasing power parity (PPP), which dictates that the price of a good should be the same everywhere, otherwise you could purchase/import the good from the lower price area and sell in the higher price area and have unbounded profit.

At the first residency in London, when everything was exciting and new, each team wandered around London trying to find the bundle of six goods and record their prices.  Arriving in Dubai, some cynicism had already set in and teams realized that it didn’t take a whole team to find six common items, nor did it take four hours.  And by the time I got to the Shanghai residency, teammate Taniya had already recorded the prices the day before the residency.  Taniya did the same thing for this residency, leaving us five hours to ourselves to eat lunch and do whatever.  Thanks Taniya!

While this exercise was a great concept, even our professor recognized that there was some design flaws in the assignment:  there were no quantities or quality standards to recording the prices!  To make this exercise work, everyone needs to be recording the same things, such as a small coffee, 1oz of Hershey’s chocolate, the price of a cab ride per minute, and so on.  When the results were presented today, PPP did roughly apply, but not with any great level of precision.  Oh well, the next class will no doubt have a more rigorous version of the assignment.

 

Related Posts:

1 comment to St. Petersburg, Day 1 (Part 1): Orientation and Academe

  • Ian Comandao

    if the whole thing could be done again, i would have the following things put on the list:
    1.) price of 1 chicken mcnugget from smallest box available (because unlike bars of chocolate, they always only come in 5 different shapes)
    2.) minimum ticket price for subway ride (because taxi drivers can be evil)
    3.) the “average” price of a pint of heini or carlsberg at a bar (because that’s where you always end up anyway)
    4.) the cheapest simcard you can get (because telecom SHOULD be the same the world over, but PPP fails here, and also so that at least one person on each team will have a local phone, and people will know where to go after taking the prices for #3… at it makes me feel better about not having BBM)

    i would keep the exchange rate steady, if only for statistical purposes