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Purchasing Power Parity and Brand-Related Pricing Essay

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Updated: Jul 29th, 2020

Purchasing Power Parity (PPP)

The PPP theory is very practical. It emerged with the abolition of the gold standard when an acute need for a new “right” correlations among the currencies of different states had occurred. In an early version of the theory, it was suggested that the value of the exchange rate between currencies under free trade conditions (i.e., with minimum trade restrictions) is determined by the relationship between their purchasing forces (James, Marsh, & Sarno, 2012). It means that following the primary function of money (i.e., a medium of exchange), the desire of economic agents to exchange one currency for another could be directly related to how many goods and services one can buy with it in the relevant country (James et al., 2012).

A more recent version of ​​the PPP theory suggests that the exchange rate value depends directly on the domestic purchasing power of the currency. In the given context, if the level of prices due to inflation in the United States changes, then the dollar exchange rate should change following the final result of those changes in prices (James et al., 2012). It means that if the price level in the country will grow by 50 percent, while the price level in other countries will remain the same, then the value of the dollar, expressed in the currency of other states, should decrease by 50 percent. Overall, as a result of inflation caused by excess money emission, the purchasing power of the national currency for all goods and services, including those involved in international trade, will decrease.

The implementation of the PPP indicator makes sense in comparison with other countries. It represents their economical size, potentials, and power (World Bank, 2015). The decrease in the dollar’s PPP may thus imply the deterioration of the United States’ position in the global economy.

Brand and Pricing

Brand-related pricing differs from other traditional approaches to establishing prices for products. When implementing the given strategy, it is necessary to take into account intangible assets: potential impacts of the trademark on the consumer, the realization of the brand value, i.e., an increase in its profitability. Besides, it is necessary to determine the brand’s position, investment policy, and distribution channels, i.e., take into account all the components of the brand asset management process.

By their nature, intangible elements represent a qualitative characteristic of the brand. They are difficult to quantify, as they represent potential revenues generated due to the introduction of the brand into the commodity circulation (Bakker, 2015). Since the brand is in a certain relation to the price strategy, it is possible to realize the brand value as an asset in the form of capital, i.e., increase profits based on the difference between the exchange price of goods and the buyers’ price (Bakker, 2015). It is possible to say that both brand equity and brand image represent the potential for the formation of a higher (premium) price compared to the nearest competing brand. Studies on brand management also show that the value of the brand can be mediated through such variables as consumer loyalty (Guzmán & Iglesias, 2012).

Overall, when determining pricing and strategic priorities, the company should determine what additional benefits it will receive at the expense of the brand values (its attributes, quality, image, convenience, loyalty, etc.). With proper use of these benefits, the value of the brand as an asset will bring additional profit to the organization through the increase in product prices or profit margins, as well as the reduction of costs associated with the brand.

References

Bakker, D. (2015). Vertical brand portfolio management: Strategies for integrated brand management between manufacturers and retailers. Wiesbaden, Germany: Springer.

Guzmán, F., & Iglesias, O. (2012). The challenges facing brand managers today. Bradford, UK: Emerald Insight.

James, J., Marsh, I. W., & Sarno, L. (2012). Handbook of exchange rates. Hoboken, NJ: John Wiley & Sons.

World Bank. (2015). Purchasing power parities and the real size of world economies: A comprehensive report of the 2011 international comparison program. Washington, DC: World Bank Group.

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IvyPanda. "Purchasing Power Parity and Brand-Related Pricing." July 29, 2020. https://ivypanda.com/essays/purchasing-power-parity-and-brand-related-pricing/.

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IvyPanda. 2020. "Purchasing Power Parity and Brand-Related Pricing." July 29, 2020. https://ivypanda.com/essays/purchasing-power-parity-and-brand-related-pricing/.

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IvyPanda. (2020) 'Purchasing Power Parity and Brand-Related Pricing'. 29 July.

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