Sunday, 12 October 2008

Naked And PPP GDP.

As a follow up to a recent post on China and the US (see post), we have been asked about the GDP calculations that we used.

There were two real candidates for the numbers to be used. The first is simple aggregate GDP in dollar terms. We have assumed dollars at 2007 purchasing levels, but this is very much the Naked Dollar approach. The second candidate was to use a measure of Purchasing Power Parity. This is a measure that takes into account the monetary difference price differences between countries. In the end, we decided to use Naked 2007 Dollars in our calculations.

We did this for two reasons:

1. People spend real $ rather than PPP$ on the world stage. As we look further into the future, we would expect relative prices to harmonise, thus lessening the difference between the real $ and the PPP $ when applied to China and the US.

2. The PPP figures are too open to political manipulation and substantial revaluations. For example, late last year, China's GDP in PPP terms was revised downwards by 40% by the World Bank (see news story). This was caused by a change in the way in which the World Bank calculates relative prices rather than anything happening in the real economy.

It is our view that PPP values are really useful in cross sectional studies at a single point in time, but that values in real currencies are better in time series because they abstract away from the issue of changes in relative prices.

© The European Futures Observatory 2008

1 comment:

John said...

This is a very reasonable approach. While GDP PPP is perhaps useful for comparing consumer lives and lifestyles in the present, you show how it's weak for tracking change and comparing things on the global market scale.