Background
The acronym “PPP” in economics has dual meanings: Purchasing Power Parity and Public-Private Partnership. Both terms serve pivotal roles in their respective domains within economics.
Purchasing Power Parity (PPP)
Originating from the concept of the law of one price, Purchasing Power Parity (PPP) is a theory utilized in economics to measure the relative value of currencies, ensuring the same quantity of goods or services can be purchased under different currencies.
Public-Private Partnership (PPP)
Public-Private Partnerships (PPPs) refer to collaborative agreements made between public sector entities and private sector companies, aimed to finance, build, and operate projects that serve the public interest.
Historical Context
Purchasing Power Parity (PPP)
The PPP theory can be traced back to the early 20th century through the works of Swedish economist Gustav Cassel.
Public-Private Partnership (PPP)
The concept of PPPs gained prominence in the late 20th century with governments seeking collaboration with private sectors to address public infrastructure needs while managing fiscal constraints.
Definitions and Concepts
Purchasing Power Parity (PPP)
- Nominal and Real Exchange Rates: PPP relates closely to comparing nominal and real exchange rates.
- Absolute and Relative Purchasing Power Parity: Absolute PPP implies that the price levels in different countries should be the same when measured in a common currency, while Relative PPP asserts that exchange rate changes over time should equal the inflation differential between two countries.
Public-Private Partnership (PPP)
- Contractual Agreements: PPPs typically involve long-term agreements where private entities handle various operational responsibilities.
- Risk Sharing: Risks and rewards are shared between the public and private sectors.
- Financing Models: Financing can range from Build-Operate-Transfer (BOT) to Build-Own-Operate-Transfer (BOOT).
Major Analytical Frameworks
Classical Economics
For PPP:
Classical economists used PPP to explain currency values based on supply and demand equilibrium.
Neoclassical Economics
For PPP:
Neoclassical economics considers both PPP and exchange rate theories to state that currency values are determined by fundamental economic variables like output and productivity.
Keynesian Economics
For PPP:
Keynesians may critique PPP for neglecting market imperfections and real-world frictions.
For Public-Private Partnership:
Marxian Economics
For Public-Private Partnership:
Maccain economists often criticize PPPs as mechanisms to extend capitalist control over public infrastructures.
Institutional Economics
For Public-Private Partnership:
Examines the governance and contract needs facilitating effective partnerships between public and private sectors.
Behavioral Economics
For PPP:
Behavioral economists may analyze the psychological and behavioral factors influencing stakeholders in PPP agreements.
Post-Keynesian Economics
For PPP:
Post-Keynesians emphasize market imperfections, critiquing both PPP arrangements and rigid applications of such theoretical models.
Austrian Economics
For PPP:
Austrian economists would critique government involvement, preferring private investment autonomy.
Development Economics
For PPP:
Examines how PPPs can expedite the development of essential infrastructure in developing nations.
Monetarism
For PPP:
Monetarists apply PPP to assess currency values without the intervention of governmental policies.
Comparative Analysis
Purchasing Power Parity vs. Other Currency Valuation Models
PPP provides a simplified yet robust method of currency comparisons and is often juxtaposed with Real Exchange Rate Theory.
Public-Private Partnerships vs. Traditional Public Funding
PPPs leverage private innovation and efficiency while opening more contentious debates about higher costs and equitable risk and reward distribution.
Case Studies
-
Purchasing Power Parity: The Big Mac Index: The Economist magazine’s Big Mac Index looks at the price of a single item (Big Mac) globally to illustrate differences in purchasing power.
-
Public-Private Partnerships in United Kingdom: Analysis of the UK’s NHS and significant rail projects demonstrates varying successes and challenges inherent in executing PPP models.
Suggested Books for Further Studies
- “Purchasing Power Parity and Real Exchange Rates” by Mark P. Taylor and Alan M. Taylor.
- “Public-Private Partnerships: Principles of Policy and Finance” by E. R. Yescombe.
Related Terms with Definitions
- Inflation Differential: The difference in the rate of inflation between two separate economies over a given period.
- Exchange Rates: The rate at which one country’s currency can be exchanged for another.
- Contract Management: The process of managing contract creation, execution, and analysis to maximize operational and financial performance.
By examining both incarnations of PPP, one can better understand two powerful elements intertwined within the contemporary economic landscape.
