Price Disparity
It is no secret that the United States and Puerto Rico use the same currency for all financial transactions, namely the U.S. dollar. The latter is even de jure the territory of the former, but an unincorporated one. Such a strange political situation allows both nations to share the same trade space and markets while maintaining separate domestic economic policies. The status quo seems more beneficial for Americans than Puerto Ricans, judging by the prices of many goods, such as cars.
For example, a New 2023 Toyota Corolla LE Sedan Front-Wheel Drive in Austin, Texas, is priced at $23,853 (New 2023 Toyota Corolla LE sedan front-wheel drive, n.d.). In San Juan, an individual wishing to purchase this vehicle must pay $29,322 (NEW 2023 Toyota Corolla LE, n.d.). As one can see, the difference is $5,469, a significant amount from both American and Puerto Rican viewpoints.
Economic Context and Purchasing Power Parity
It is worth noting that the island nation has been facing significant economic challenges for a considerable period. According to Glassman (2019), its poverty rate reached just over 43% by the end of the last decade. The country’s Gross Domestic Product is also significantly lower than that of the U.S.; therefore, prices for most goods, including cars, should be equal or even lower. However, the situation regarding the two products under discussion is opposite. Applying purchasing power parity theory to the issue explains why Puerto Ricans have to hand over more than $5,000 extra for a Toyota Corolla compared to other U.S. citizens in 2023.
Factors Contributing to Higher Vehicle Prices in Puerto Rico
The difference in tax systems between the two nations, which share the same currency, partly explains the variation in Toyota Corolla prices between the two cities. One of the unique features of the North American economic powerhouse is that there is no national sales tax. Conversely, Puerto Rican domestic monetary policy implies state and country sales taxes. For example, “the state general sales tax rate of Puerto Rico is 10.5%,” experts from the International Trade Administration state (Imports tariffs overview and resources, n.d., para. 23).
According to Pakko and Pollard (2003), taxes on products imposed by governments are one of the major factors preventing the achievement of an equilibrium in the purchasing power of people in two specific countries. Taxation is not the only reason Puerto Rican dealers demand more money for the 2023 Toyota Corolla.
The second factor behind the $29,322 price tag is shipping costs. Pakko and Pollard (2003) believe that “transportation costs… may drive a wedge between the prices of the same good in different markets” (p. 16). For Puerto Rican car dealerships to sell the 2023 Toyota Corolla to communities around them, they need to purchase it from the U.S., where it is manufactured, and pay for shipping to ports, as well as sea and land freight. All these procedures are costly and lead to inequality in the purchasing power of the populations of the two territories.
There is a third factor that makes a difference to the Big Mac index of the two countries. Pakko and Pollard (2003) explain that these are trade restrictions such as tariffs. It is the most influential one of all three discussed here; however, it is irrelevant to US-Puerto Rico trade ties. The U.S. government does not consider shipments to this territory as exports (9 -shipping to Puerto Rico and other U.S. territories, n.d.). Therefore, only taxes and transportation costs should be considered as contributors to the extra $5,469.
References
9 -shipping to Puerto Rico and other U.S. territories. (n.d.). Privacy Shield Framework.
Glassman, B. (2019). A third of movers from Puerto Rico to the mainland United States relocated to Florida in 2018. United States Census Bureau.
Imports tariffs overview and resources. (n.d.). International Trade Administration.
NEW 2023 Toyota Corolla LE. (n.d.). Triangle Toyota De San Juan.
New 2023 Toyota Corolla LE sedan front-wheel drive. (n.d.). AutoNation Toyota South Austin.
Pakko, M. R., & Pollard, P. S. (2003). Burgernomics: A Big Mac™ guide to purchasing power parity. Federal Reserve Bank of St. Louis.