Skip to main content

Honey, I blew up a few economies.

The International Comparison Program (hosted at the World Bank) just released its new estimates of Purchasing Power Parity that are used to compare GDP across countries. These estimates are released about every 5 years and they serve as the basis for the PPP-adjusted statistics used by most international organizations or statistical sources. These estimates get updated on an annual basis using inflation rates but it is the 5 year survey that produces the complete data that allows us to compare purchasing power across countries.

The release was picked up by all news outlets by emphasizing the fact that China looks bigger than what we thought before and it is likely to become the number one economy by the end of 2014 (e.g. Financial Times). The news on China makes for great headlines but the reality is that many countries saw significant changes in their PPP estimates, let's look at some magnitudes.

Before looking at magnitudes, a clarification on methodology: PPP estimates are done for a particular year (2011 in this case). The PPP adjusted figures released this week take the same GDP data that we already were using for that year and what they do is to publish a new set of PPP estimates that allows for a conversion of GDP to a purchasing-power basis just for that year (2011). Soon most databases will start using those PPP estimates (from 2011) to extrapolate and calculate the recent annual GDPs (2013). But this calculation will be done by adjusting 2011 PPP estimates with domestic inflation rates. To understand what has really changed with these new estimates and avoid the possible distortions that using inflation rates could cause let me do a simpler calculation: let's stick to 2011 GDP and ask the following question: How different is the size of economies as calculated using 2011 PPP compared to what we thought before these estimates were released? Before these estimates were released we were using PPP estimates calculated in 2005 updated using domestic inflation rates.

If you do that calculation, China increased its size by about 21%. But China is not alone. In fact there are 65 countries whose size increased even more than that. And there are about 30 countries where the increase was larger than 50%. Below are some examples:
Country
Increase in
2011 GDP PPP
UAE
109%
Myanmar
103%
Indonesia
85%
Saudi Arabia
65%
Egypt
64%
Pakistan
53%
Thailand
51%
Philippines
41%
Russia
36%
Iran
33%
Malaysia
32%
Romania
30%
India
28%
Nigeria
25%
Brazil
24%
Turkey
23%
China
21%

The UAE doubled its size and becomes a $500+ billion economy (larger than Belgium). Indonesia increased by 85% to pass $2 trillion and becomes the 10th largest economy in the world (larger than Italy and very close to the UK). All these are very large changes that clearly show that the most recent PPPs have introduced a completely different lens to compare price levels and living standards across countries. The pattern is that emerging markets tend to look a lot cheaper than what we thought earlier and therefore their GDP measured in purchasing power parity looks much larger.

What is interesting is that this has not always been the case. The previous release of PPP estimates (2005) caused a lot of controversy because they reduced the size of the Chinese economy by about 15%. 

One can argue that changes in the PPP-adjusted size of countries have very little practical impact, GDP has not really changed. It does have an impact on those who care about size and rankings of countries and think that PPP-adjusted series are better are capturing size (which is probably not correct, but I will leave this for another post). But it also has a large impact for those who care about comparisons of living standards (for which PPP correction is a must): these large movements in PPP estimates completely change our reading of living standards for many countries. if you are a researcher, get ready to update all your regressions!

Antonio Fatás 

Comments

Post a Comment

Popular posts from this blog

The permanent scars of economic pessimism

Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical. It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance. Why did they change their mind? Is this evidence consistent with the standard economic models that we use to think about cyclical developments? Measuring potential output or the slack in the economy has always been challenging. One can rely on models that capture the factors that drive potential output (such as the capital stock or productivity or demographics) or one can look at more specific indicators of idle capacity, such as capacity utilization or...
Post a Comment
Read more

The 2020 (US) Recession

Summary: This post is based on a research note I wrote asking whether low unemployment is sustainable. The answer is a clear no for the US. Low level of unemployment are good predictors of the tail risk event of a recession, a sharp increase in unemployment rates. These dynamics are related to the build up of financial and macroeconomic imbalances. If this pattern is to repeated, and given the current level of unemployment rate, a US recession must be around the corner. For details on the analysis, the research note including additional results is available on my web site: Fatas (2019) . A few months away from the longest US expansion The US economy is a few months short of beating the longest expansion ever, which took place from March 1991 to March 2001. As we approach this milestone, there are increasing concerns about the possibility of a recession in the coming years. Do expansions die of old age? The empirical evidence suggests that this is not the case. There is no clear correla...
Post a Comment
Read more

German economic policy and chameleons

Wolfgang Munchau's FT article today is one of the most complete explanations I have seen about the origin and contradictions of the German economic orthodox dogma. The only issue that he does not address is how these economic views have survived over time despite the increasing evidence that their advice does not deliver the expected results. Here is my guess from what I have learned from many heated discussions over the last years about economic policy in Europe: the resilience (stubbornness) of this view on economic policy comes from a combination of faith and the inability of the economic profession to apply enough real world filters to models. Faith in a certain economic model comes from many years of being trained about the beauty of markets and all the inefficiencies that governments generate. But faith also comes from the belief that only through (individual) hard work and sacrifice (saving) one can achieve any economic progress. In this world (what Wolfgang Munchau refers ...
Post a Comment
Read more