Re: PPP comparisons
On 8/5/2004 Sam Pawlett wrote: One thing I've never understood about PPP, is it an attempt to measure -what it is like living in a poor country- or is the idea more modest as the above paragraph suggests trying to demonstrate what the market equivalent amount of currency buys in a given country? For example the PPP GDP or GNP per capita of a country is $US 500. Does this mean that living in that country on that given amount of money is like living in the USA on the same amount of money? It is more muddled than that. PPP creates its own international currency: the international dollar which makes things not very comparable (but you only see that if you look hard for the footnotes and sometimes it is left out). PPP does use the US as the normalizer - i.e. the U.S. PPP basket = 100 so, if one believed in the U.S. basket as a true reflection of U.S. life (not an accurate assumption) then $500 in PPP would be like living on that in the U.S. Paul Paul
Re: re PPP comparisons
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. So the developing country's GNI per capita feels low for various reasons. For example conventional National Accounts would normally leave out all the non-market income of the traditional economy in a developing country. Likewise, the whole pattern of life changes to facilitate the lower standard of living. I recall when it was not rare in Europe not have a refrigerator (or only a small one). People ate perfectly well because things were organized around this: small portions at regular prices, distribution channels were structured so people could shop for food every day, etc. Today, if you can't afford a refrigerator it becomes hard to imagine how most West European families would cope. People think of the low per capita income in developing countries and say it makes no sense in terms of comparing lives. It doesn't, but that is because national accounts compare market economies not living standards. Along comes PPP which recalculates the numbers and since it moves developing countries closer to the developed countries, people think it makes more sense. But the more realistic numbers are entirely coincidental - they still are not measuring living standards because national accounts measure something else. But, on its own terms PPP probably overshoots the developed\developing country relationship for narrow statistical reasons (the PPP authors admit this) and distort rankings within developing countries (for example the PPP conversion factor for Venezuela is relatively small because it is already much integrated in the tradable economy). Above all the PPP becomes treacherous when one starts to then use them outside of per capita comparisons - e.g. growth rates over time, response to neoliberal measures, etc. [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.] Paul
re PPP comparisons
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 $20 USD per month. Anyone think that tells us very much about the Cuban standard of living? michael PPP comparisons by sam pawlett 05 August 2004 14:54 UTC Thread Index Take a simple example of Japan and the US. Say the market exchange rate is 110 Yens = One US$. Now take an equivalent basket--in quantity and quality--that contains a burger with fries and a drink. It costs 450 Yens in Tokyo and US$ 2.50 in New York. The PPP exchange rate is then 180 Yens = One US$ (450/2.50). There is nothing imaginary about the PPP exchange rate since it gives you the purchasing power of a country's currency vis-a-vis the US dollar. One thing I've never understood about PPP, is it an attempt to measure -what it is like living in a poor country- or is the idea more modest as the above paragraph suggests trying to demonstrate what the market equivalent amount of currency buys in a given country? For example the PPP GDP or GNP per capita of a country is $US 500. Does this mean that living in that country on that given amount of money is like living in the USA on the same amount of money? PPP (and the averaging and aggregating that goes on) can be misleading.A string sampling bias exists. There are no price differences between countries in goods and services that are offered by MNC's. The costs of Mcdonalds,Bechtel water, Enron nat. gas, or a Blockbuster video is the same across geographical space with very limited differential. The IMF and its coat-tailers always (and ,yes, still) say that the most important economic fundamental is getting prices right. The right price or international market price always seems to be what the good or service costs in the USA. How could it be otherwise, inflation always exists and the bulk of demand for the goods and services offered by MNC's is still in the North hemisphere. Ultimately, the WTO project gets more goods and services to cost what they cost in the USA and Europe. And as that happens, people's access to those goods and services becomes more limited, Bechtel water in South Africa for example. The products offered by local or import substituting businesses cost much less. The marlboro, pizza hut or coca-cola knockoff costs %25 as much. The more foreign based products it counts in its basket of goods, the bigger the PPP number will be. As the world becomes globalized and the stricter that gov'ts enforce WTO rules, the Atlas rather than ppp will come closer to the truth especially with imports and exports being priced in US dollars and the ongoing dollarization of world economies. I don't think this is an unimportant quibble, as it represents trends sometimes called combined and uneven development. Sam Pawlett Michael A. Lebowitz Professor Emeritus Economics Department Simon Fraser University Burnaby, B.C., Canada V5A 1S6 Currently based in Venezuela. Can be reached at Residencias Anauco Suites Departamento 601 Parque Central, Zona Postal 1010, Oficina 1 Caracas, Venezuela (58-212) 573-4111 fax: (58-212) 573-7724
