Question

4. The price and average per capita consumption per year of a food-bundle and transportation of the same quality in Russia and US are Food-bundle P Q Transportation RESP Russia 40,000 rubles 1 300,000 rubles 1/15 The US $10,000 $10,000 a) Compute Russia and US per capita consumption in rubles and dollars, respectively. b) Assuming $1-30 rubles exchange rate, convert Russia's per capita consumption from rubles to dollars. c) Using PPP, i.e., the same prices in the two countries, and US prices, first compute Russia's per capita consumption in rubles and then convert it to dollars. d) In both b) and c), compute Russia's standard of living as a percentage of US standard of living. What do you conclude?

Answer 1

a)

Consumption	Food bundle	Food bundle	Total per Capita
P	Q	PxQ	P	Q	PxQ
Russia (Rubles)	40000	1	40000	300000	0.066667	20000	60000
US ($)	10000	1	10000	10000	1	10000	20000

The total per capita consumption in Russia is 60000 rubles and in the US it is $20000

b)

Russia's per capital consumption in rubles	60000
Russia's per capital consumption in dollars (rubles / 30)	2000

c) If we take US prices for Russia per capital consumption, the table changes as follows:

Consumption	Food bundle	Food bundle	Total per Capita
P	Q	PxQ	P	Q	PxQ
Russia (USD)	10000	1	10000	10000	0.066667	666.6667	10666.67
US ($)	10000	1	10000	10000	1	10000	20000

d) The two comparative per capita spends are:

according to part b: Russia $2000, US $20000, giving a ratio of 1:10 between Russia and US

according to part c: Russia $10,667, US $20000, giving a ratio of 1.03:2 between Russia and US

The conclusion is that Russia certainly has a lower standard of living than the US, but the market exchange rate (first comparison above) shows a much lower standard than the PPP one (teh second comparison above)