Editing Purchasing power parity (section)

===Range and quality of goods===
The goods that the currency has the "power" to purchase are a basket of goods of different types:
# Local, non-tradable goods and services (like electric power) that are produced and sold domestically.
# Tradable goods such as non-perishable [[Commodity|commodities]] that can be sold on the international market (like [[diamond]]s).

The more that a product falls into category 1, the further its price will be from the currency [[exchange rate]], moving towards the PPP exchange rate. Conversely, category 2 products tend to trade close to the currency exchange rate. (See also [[Penn effect]]).

More processed and expensive products are likely to be [[tradable]], falling into the second category, and drifting from the PPP exchange rate to the currency exchange rate. Even if the PPP "value" of the Ethiopian currency is three times stronger than the currency exchange rate, it will not buy three times as much of internationally traded goods like steel, cars and microchips, but non-traded goods like housing, services ("haircuts"), and domestically produced crops. The relative price differential between tradables and non-tradables from high-income to low-income countries is a consequence of the [[Balassa–Samuelson effect]] and gives a big cost advantage to labour-intensive production of tradable goods in low income countries (like [[Ethiopia]]), as against high income countries (like [[Switzerland]]).

The corporate cost advantage is nothing more sophisticated than access to cheaper workers, but because the pay of those workers goes farther in low-income countries than high, the relative pay differentials (inter-country) can be sustained for longer than would be the case otherwise. (This is another way of saying that the wage rate is based on average local productivity and that this is below the per capita productivity that factories selling tradable goods to international markets can achieve.) An equivalent [[cost]] benefit comes from non-traded goods that can be sourced locally (nearer the PPP-exchange rate than the nominal exchange rate in which receipts are paid). These act as a cheaper [[factor of production]] than is available to factories in richer countries. It is difficult by GDP PPP to consider the different quality of goods among the countries.

The Bhagwati–Kravis–Lipsey view provides a somewhat different explanation from the Balassa–Samuelson theory. This view states that price levels for nontradables are lower in poorer countries because of differences in endowment of labor and capital, not because of lower levels of productivity. Poor countries have more labor relative to capital, so marginal productivity of labor is greater in rich countries than in poor countries. Nontradables tend to be labor-intensive; therefore, because labor is less expensive in poor countries and is used mostly for nontradables, nontradables are cheaper in poor countries. Wages are high in rich countries, so nontradables are relatively more expensive.<ref name="Krugman"/>

PPP calculations tend to overemphasise the primary sectoral contribution, and underemphasise the industrial and service sectoral contributions to the economy of a nation.