Many economic statistics seem conceptually simple, but are rather intricate and technical as actually measured (or more accurately, constructed). You can’t just line up dollars of GDP and count them. Price indices are similarly fiendish.
Conceptually, the purchasing power parity exchange rate between two countries is simply the relative cost, in local currency units, of buying the same basket of goods in each country. This can be very different from the market exchange rate, but is generally a better way to convert, say, GDP per capita, if you’re interested in cross-country comparisons of welfare (GDP? welfare? we’re already on shaky ground…)
Last week another Australian I know in DC was surprised to see that the International Comparison Program’s (ICP) 2015 PPP exchange rate for Australia is 1.487. Are things really 50% more “expensive” (dollar for dollar) in Australia, he wondered?
I believe strongly in simple models and straightforward measures. But even the simplest measures can hide complexity and strong assumptions. This was brought home to me by two stories that have been in the news in the last fortnight, relating to two of the most common numbers you will come across in social science research and reporting: the unemployment rate and life expectancy. Both news stories raised questions about how these numbers were interpreted.
This is the first of what may become a series of posts, and focuses on life expectancy.
Trending #8 on BBC News recently was “How in a single year did life expectancy in the US drop by 12 years?”, a clickbait title for a story about the Spanish flu of 1918, which swept across the world in the wake of the First World War.
The 12 year drop caught my attention, so I dug around, and – confusingly – this statistic is both true and highly misleading. Like the “interest rate”, there is no single thing called “life expectancy”. Media reports rarely explain which version of life expectancy they mean – in this case the BBC links to a US National Archives webpage which is no more specific, and doesn’t cite a source. That’s frustrating, because there are important assumptions embedded in the ‘standard’ quoted life expectancy measure, which, spelt out, is ‘period life expectancy at birth’.