Answer to Question #166050 in Economics for Manyela

Question

Nobel – Prize winner Amartya Sen argues that economic development has to be seen as a process of expanding real freedoms which people experience. She also classified Purchasing Power Parity as one of the determinants of economic development in a country. In her analysis, she felt that multinational companies or international businesses needed to produce goods and services which would cost the same around the world.

Provide an analysis of why goods and services cost differently in nations where they are produced or consumed. Is the situation going to be brought to a level where goods or services would cost the same globally? Also state in your analysis, the cheap and expensive locations for the production of these goods and services.                                                 

Answer 1

There are a number of factors that influence the prices of these products in different countries.

Taxes and import duties

One of the main factors affecting the prices of goods is the difference in taxes and import duties in different countries. For example, Brazil has an import duty of 60%, which makes imported goods like cars and phones much more expensive. Many goods are cheaper in Japan thanks to lower import taxes and improved wholesale prices.

Even local taxes are important. If San Francisco has a sales tax of 8%, London has a 20% value-added tax (VAT), it will significantly affect the prices paid by consumers. When it comes to exports and imports, there is a significant difference between handling sales tax and VAT. When exporting a product, VAT is charged on the product, but sales tax is not. When importing goods, the importer pays sales tax on the full price of the goods but pays VAT only for the value-added of the importer. If you are importing to a country that does not have VAT from a country with VAT, the product will be subject to double taxation. Export country of VAT importing sales tax.

When it comes to oil prices, prices vary greatly due to subsidies in some countries and fuel taxes in others. It is for this reason that gas is absurdly cheap in oil-producing countries such as Venezuela and Saudi Arabia. US taxes vary from state to state.

Perceived value

Another important factor is that prices for items such as electronics and cars are not always based on the cost of producing them. A product may have a higher perceived value in one country than in another. A generic brand can be sold in one country and can be sold. Even the cost of doing business in a country can affect prices. Hiring employees and setting up stores won't cost the same in every country.

High tax rates, high-cost levels, and high prices for common goods, while these price differences can make big bucks for governments, the real loser is the consumer.