Purchasing Power Parity
During the last two years the Executive Committee has been re-evaluating how best to fairly implement membership requirements so that MDRT remains The Premier Association of Financial Professionals throughout the world.
The journey the Executive Committee took to arrive at the Purchasing Power Parity (PPP) index as the method to determine worldwide membership qualifications began after receiving recommendations from the 2004 Leadership and Governance Task Force to raise U.S. membership requirements to $100,000 over the next five years and factor in currency exchange rates for non-U.S. members. While we agreed with their recommendation relative to the $100,000 threshold, the exchange rate factor concerned us for several reasons. Perhaps, most especially, we were concerned that currency rates can fluctuate wildly for political, economic, and environmental events, to mention just a few. We sought a scientific method that would be equitable, and could be fairly applied.
Last year, we engaged Dr. Judy Xanthopoulos, a noted expert in income measures and income distribution topics, who, having researched the issues, proposed a solution that relies on the PPP index produced by the World Bank. The World Bank is a recognized, comprehensive, global source for such data and they generate the most comprehensive and reliable information for this type of measurement.
The PPP emerged as the best method for determining global production requirements because it provides both an equitable and uniform methodology by which to express the U.S. production requirement in our other member countries' local currencies.
In its simplest form, the PPP index (see exhibit) is a comparison of the average prices of goods and services between two countries. The conversion occurs in a way to ensure that a given amount of one country's currency will purchase the same basket of goods (i.e.: food, clothing, shelter, etc.) and services in the second country as it does in the first (see the example below, "Understanding Purchasing Power Parity Index).
Our intention is to ensure that MDRT's membership production requirements remain both fair and meaningful; plus reflect the prestige associated with membership in the Premier Association of Financial Professionals, and that they are equitable among all of our member countries.
Understanding Purchasing Power Parity Index
To understand the PPP index and the information that it conveys, consider a good that remains the same, no matter where the item is sold. For this example, let's assume that a good costs $500 USD in the United States and $600 USD in Country A. Suppose that $600 USD is the equivalent of 3,000 units of country A's local currency (using the official exchange rate established by the World Bank). Then, we could say that same good that costs $500 USD costs 3,000 units of local currency in Country A. Thus, the PPP index would express the relative prices of the same good in each country's currency (3,000/500=6).
The actual PPP measure includes hundreds of goods from approximately 155 categories of GNP, for each country in the study. It also applies weights to depict the relative use of these goods, so that the index represents accurately the importance of these goods to the economy.
Using the same assumptions to determine for Country A the 2007 production required for the 2008 Round Table, we would multiply the U.S. membership production requirement of $81,800 USD by 6 to get the membership production requirement of 490,800 units of local currency.
During subsequent years, the membership production requirement for each country will track with the U.S. production requirement and will be calculated using the then-current PPP data.
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