on country comparisons

[michael a. lebowitz]

Paul, I've forwarded your earlier note commenting on my former colleague's reply to him; I'll post his answer if/when I get it.

 Paul wrote:
11 August 2004 17:56 UTC < < <
 
On  8/7/2004 Mike Lebowitz wrote:

        I don't know anything myself about the way the PPP is constructed or the neoclassical assumptions that Paul proposed were used. Intuitively, though, it makes real sense to select the PPP measure (ie., something that takes into account prices) over one using market exchange rates. Eg., according to the dollar/cuban peso market exchange rate, we might conclude that Cubans live on the equivalent of $20 USD per month. Anyone think that tells us very much about the Cuban standard of living?
        michael

[Yes this is where most people get drawn into the PPP : the per capita GNI (or GDP) numbers look so low.  And they are low, if we think of measuring "living standards" which GNI or any of the national accounts do NOT, they only are a ticker to the market economy without double accounting.    Comparing national accounts is only a 'market economy to market economy' basis.]
 
Maybe I've introduced a new question--- I was taking a Cuban monthly wage (let's say 300 pesos) and the dollar/peso street exchange rate (say $25), which would lead one to conclude that Cubans live on $12USD per month. Ie., I wasn't raising national accounting questions as such. Now, a little casual empiricism tells me that living standard for Cubans is nothing like what $12 USD would be in the US. So, I ask, what would be a better measure of the Cuban standard? Intuitively, I am inclined to say--- we need to take into account the things that have zero or nominal prices in Cuba. Are you saying that doing that leads in the wrong direction because to price things completely we end up making neoclassical assumptions? (How sensitive are the conclusions to particular NC assumptions?) I.e., I'm prepared to accept your criticisms of the PPP measure but I'm not certain what exactly you are proposing as an alternative.

Paul:

[BTW: I don't know how Cuba's national accounts are calculated.  The World Bank does not publish any figures at all.  I imagine it is largely guesswork by whomever you are citing (UN?); as you know most planned economies used Net Material Product as their equivalent.  There can't be a logical conversion factor for the same reasons PPP doesn't work (apples and oranges).  In fact, that is how this international comparison business got started (for example Gerschenkron, Alexander  A dollar index of Soviet machinery output, 1951).  It was quickly grasped (a bit like PPP) as an ideological tool, ultimately with people like Wolfowitz and Pipes jumping in.]

        You raise here an interesting parallel. If I recall the Soviet growth question, it revolved around the fact that implicitly two different questions were being asked; (a) what is the growth rate using 1927/8 prices and weights (ie., before a significant transformation) and (b) what is the growth rate using later (eg., 1954) weighting and prices. Insofar as sectors with high initial prices grew quite rapidly (and their prices fell relatively), those choosing (b) could scoff at the Soviets who used (a). A first issue, then, is what question do we want to ask? A second consideration is whether we learn anything by asking both questions and establishing a range? In the matter on hand, what is the question we are asking? Taking the Kenya/ Manhattan comparison you raised before, do we ask what it would cost a Kenyan to consume the Kenyan basket in NYC and how that changes over time? Or do we ask what it would cost to consume a NYC basket in Kenya? Or do we say, all of this is going to be artificial--- let's just take the real wage in Kenya and the verifiable currency exchange rate?
        Is this basically the same question that you were exploring or have I gone off in a completely different direction?

        in solidarity,
          michael

Michael A. Lebowitz

Professor Emeritus

Economics Department

Simon Fraser University

Burnaby, B.C., Canada V5A 1S6

Currently based in Venezuela. Can be reached at

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Parque Central, Zona Postal 1010, Oficina 1

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(58-212) 573-4111

fax: (58-212) 573-7724