statistics

Calculating Purchasing Power Parity is easy (but doing it well is difficult)

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?

icp-ppp-aus

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Growth slowdown (2): GDP is a measure of a mid-20th century industrial economy

(Back to the overview post)

The invention of modern national accounting, which includes the construction of GDP estimates, is credited to Kuznets and others, who did pioneering work on measuring output in the 1930s and 1940s. Ever since it was invented, thoughtful economists have cautioned against using GDP as a measure of welfare; all the while most other economists do just that.The standard criticisms of national output are outlined in clarity by the Stiglitz-Sen-Fitoussi commission, or more poetically by Robert Kennedy:

 

I would express these specific criticisms in a common way:

GDP measures the things that seemed important in 1940.

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