Download Clarification of PPP

Economics 448
September 12, 2012
J.R. Walker
Clarification of PPP
I managed to complicate the discussion of Purchase Power Parity unnecessarily. Some ideas are
difficult and are challenging to present. Others are straightforward. PPP belongs to the later
group.
The important point is to distinguish between traded and non–traded goods and services. Nontraded goods and services include housing, food and live entertainment. Traded goods include
automobiles, computers, consumer electronics to mention only a few. Virtually, all goods can be
traded internationally, the dichotomous distinction is useful analytically.
Poor households in developing economies largely consume non–traded goods. The market exchange rate reflects only the price of traded goods. Thus, using the market exchange rate to convert household income from a local currency to a common international one (e.g., U.S. dollars,
or the Euro) gives no weight non–traded goods. Since the relative price of traded goods is relatively higher in developing countries, use of the market exchange rate will over adjust income in
the conversion from local to common–international currency. The PPP conversion factor includes
non–traded goods in the consumption basket and thus represents a more accurate estimate of the
real purchasing power within the country.
I thought it more informative to use data from the World Bank to clarify the calculation of PPP
index. The data are online at http://data.worldbank.org/. Table 1 reports GDP per capita
for Australia and Mexico for the years 2007–2011. The data series needed are defined below. The
table shows each step in the calculation and the name of each series for easy reference. I encourage
to reproduce Table 1 perhaps for another pair of countries to gain some experience working with
this important data source.
GDP (current Local Currency)
GDP at purchaser’s prices is the sum of gross value added by all resident producers
in the economy plus any product taxes and minus any subsidies not included in the
value of the products. It is calculated without making deductions for depreciation of
fabricated assets or for depletion and degradation of natural resources. Data are in
current local currency.
GDP (current US$)
GDP at purchaser’s prices is the sum of gross value added by all resident producers
in the economy plus any product taxes and minus any subsidies not included in the
value of the products. It is calculated without making deductions for depreciation of
fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using
single year official exchange rates. For a few countries where the official exchange rate
does not reflect the rate effectively applied to actual foreign exchange transactions, an
alternative conversion factor is used.
Official Exchange Rate (Local Currency per US$, period average)
Official exchange rate refers to the exchange rate determined by national authorities
or to the rate determined in the legally sanctioned exchange market. It is calculated as
an annual average based on monthly averages (local currency units relative to the U.S.
dollar).
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Economics 448
September 12, 2012
J.R. Walker
Population
Total population is based on the de facto definition of population, which counts all
residents regardless of legal status or citizenship–except for refugees not permanently
settled in the country of asylum, who are generally considered part of the population
of their country of origin. The values shown are midyear estimates.
PPP conversion factor (GDP) to market Exchange Rate Ratio
Purchasing power parity conversion factor is the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market
as a U.S. dollar would buy in the United States. The ratio of PPP conversion factor to
market exchange rate is the result obtained by dividing the PPP conversion factor by
the market exchange rate. The ratio, also referred to as the national price level, makes
it possible to compare the cost of the bundle of goods that make up gross domestic
product (GDP) across countries. It tells how many dollars are needed to buy a dollar’s
worth of goods in the country as compared to the United States
2
1
2
3
4
5
6
7
8
9
10
Table 1: GDP per Capita 2007-­‐2011 for Australia and Mexico
Date: September 12, 2012
Australia
World Bank Series
GDP (current Local Currency)
NY.GDP.MKTP.CN
GDP (current US$)
NY.GDP.MKTP.CD
GDP PPP convert via market exchange rate
Population, total
SP.POP.TOTL
GDP per capital current local currency
GDP per capital in US $ (via mxr)
Official exchange rate (LCU per US$, period average) PA.NUS.FCRF
PPP conversion factor (GDP) to market exchange rate ratio
PA.NUS.PPPC.RF
GDP per capita PPP
GDP per capita PPP as fraction of US GDP per capita
11
12
13
14
15
16
17
18
19
20
Mexico
World Bank Series
GDP (current LCU)
NY.GDP.MKTP.CN
GDP (current US$)
NY.GDP.MKTP.CD
GDP PPP convert via exchange rate
Population, total
SP.POP.TOTL
GDP per capital in Local currency
GDP per capital in US $
Official exchange rate (LCU per US$, period average) PA.NUS.FCRF
PPP conversion factor (GDP) to market exchange rate ratio
PA.NUS.PPPC.RF
GDP per capita PPP
GDP per capita PPP as fraction of US GDP per capita
Line
United States
21 GDP (current US$)
22 Population, total
23
World Bank Series
NY.GDP.MKTP.CD
SP.POP.TOTL
GDP per capita (current US$)
Abbr/Formula
line1/line2
line1/line4
line2/line4
line6/line8
line9/line23
Abbr/Formula
line11/line12
line11/line14
line12/line14
line16/line18
line19/line23
Formula
line21/line22
2007
1.09163E+12
8.57057E+11
1.27
21072500
51,804
40,672
1.20
1.1208
36,288
0.783
2008
1.18574E+12
1.06158E+12
1.12
21498500
55,155
49,379
1.19
1.3242
37,290
0.797
2009
1.25524E+12
9.24197E+11
1.36
21951700
57,182
42,101
1.28
1.0677
39,432
0.873
2010
1.28478E+12
1.13162E+12
1.14
22299800
57,614
50,746
1.09
1.3299
38,158
0.817
2011
1.39133E+12
1.37176E+12
1.01
22620600
61,507
60,642
0.97
1.5366
39,466
0.815
2007
1.13208E+13
1.03593E+12
10.93
109220753
103,651
9,485
10.93
0.674908378
14,053
0.303
2008
1.21813E+13
1.09448E+12
11.13
110627158
110,111
9,893
11.13
0.671134056
14,741
0.315
2009
1.19237E+13
8.82355E+11
13.51
112033369
106,430
7,876
13.51
0.568294531
13,859
0.307
2010
1.30893E+13
1.03587E+12
12.64
113423047
115,402
9,133
12.64
0.627086247
14,564
0.312
2011
1.43529E+13
1.15532E+12
12.42
114793341
125,032
10,064
12.42
0.656076797
15,340
0.317
2007
1.39618E+13
301231207
46,349
2008
1.42193E+13
304093966
46,760
2009
1.38636E+13
306771529
45,192
2010
1.44471E+13
309349689
46,702
2011
1.5094E+13
311591917
48,442