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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). 1 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