New Metropoles

Jose G. Perez jgperez at
Tue Nov 2 20:45:30 MST 1999


    I think you misunderstand the purchasing power parity GDP. Properly used
and understood, it is no more "unreliable" a basis for calculating GDP than
any other. Contrary to your impression, it in NOT a measure of "purchasing
power." It is a measure of production. The difference between PPP GDP and
other GDP measures is how the value of that production is computed.

    What purchasing power parity does is try to eliminate the distortion in
comparing GDP figures from various countries introduced by different price
levels and fluctuating exchange rates.

    To take an ultrasimplified example: suppose there are two countries
whose entire economies consist of one product, say bread. But in country "A"
bread is worth 10 cents a pound, or one tenth of a dollar, whereas in
country "B" it is worth 1 Franc or 100 centimes a pound. The exchange rate
is at parity, i.e., 1 cent=1 centime.

    If both countries produced 1,000 lbs. of bread, then the GDP of "A"
would be $100 dollars, that of "B" $1000 dollars, or ten times as much, even
though we know the output of both economies was exactly the same, i.e.,
1,000 lbs of bread. What purchasing power parity calculations do is try to
factor out from the GDP figure the difference in price levels between
countries when adding up the total value of goods and services produced in
the different economies. The point of the figure is to compare two or more
economies. So in this case, we might decide that to make the comparison
valid, we should use the average price of bread in the two countries. This
would be 55 cents or centimes/lb, which would give equal GDPs for the two
economies of 550 dollars/francs.

    This is quite necessary, for price levels and exchange rates can and do
fluctuate all over the map. That I can recall, in the past few years the Yen
has been everywhere from about 80 to the dollar to more than 130 to the
dollar. Using exchange rates when trying to compare ACROSS economies is like
using a rubber ruler that is constantly expanding and contracting.

The U.S. does not "look" richer by this PPP measure due to American
borrowing from abroad to finance imports. Imports are not included in GDP
figures, they are included in the exporting country's GDP. What this measure
reveals is that the United States IS, IN FACT, richer, and by a pretty
significant margin, than its major rivals.

You leave uncommented the other GDP figures I present. In case it wasn't
clear from my post, these are GDP volume figures for each economy, not at
all affected by purchasing power parity calculations. They're simply the
growth in real terms (i.e., discounting inflation) of the domestic product.
The calculation is done in national currencies with no influence from
exchange rates or purchasing power parity ratios.

>Second, long-term exchange rate trends show the euro/yen currencies rising
>vs. the dollar in the course of the 1990s. The euro has dropped a bit
>against the dollar, but given huge US trade and current accounts deficits,
>this is probably temporary.

I'm not sure what the "long term exchange rate trends" show, but I also do
not understand the point you are making. If it has to do with comparing
GDP's, I think the purchasing power parity calculations are in principle far
superior (assuming they are competently done). I do know that, in general,
price levels tend to be higher in Europe and Japan than in the United
States, so using exchange-rate-based GDP numbers is going to give you an
inflated figure for those countries. You've "translated" the euros and yens
to dollars, but in fact that dollar shrinks when it crosses either ocean
coming from the United States. What that dollar could buy you in Chicago is
going to cost, say $1.10 or $1.20 in London, Berlin or Tokio.

Suppose that "something" is, say, a bagel, which we'll say costs $1 in the
U.S. and $1.25 in Paris (that $1.25 being some amount in euros converted to
dollars at the current, or some other exchange rate). And let's say both the
U.S. and the E.U. each produce 1 billion bagels/year. On an exchange rate
basis, the U.S. national accounts for Bagels would show $1 billion, and for
the EU, $1.25 billion. I can guarantee you soon there would be articles in
the press about the "bagle gap" and how the EU has outpaced former "bagle
king" America and produces 25%. In fact, Europe isn't producing 25% more
bagels, it is producing bagels that are 25% more expensive.

If this is true, by the way, that general price levels are higher in other
advanced capitalist economies than here, then that's all the more reason for
the Japanese and Europeans to be sending their money to the United States.

The figure you report for Japanese per capita GDP at current exchange rate
shows the fallacy of relying on these to do comparisons across economies.
They would lead you to think that Japan produced a third more per person
than the United States, when in reality, close to the opposite of that is
the case.

On the U.S. population figure, I really didn't give it any thought, that's
the one the OECD had but now that you mention it, it does seem too low.
Moreover the "age structure" chart shows 22 million people 14 and under,
which would be about 1.5 million/year, which fully accounts for a 0.5%
annual increase and I know there are at least several hundred thousand adult
immigrants every year, so the U.S. figure must be too low.

Assuming, that your 1% population growth figure for the U.S. is correct,
that would still leave U.S. growth since 1990 a half a percent more per year
than the best performing European economies, or about 0.9% more if the
latest corrections to U.S. GDP figures are taken into account. A sustained
difference of half a percent in per capita GDP growth over 9 years to me is
very sizable, especially since the U.S. has a significantly higher per
capita volume, so that a 1% increase for the United States is almost $300
per capita, and for the European Union it is just over $200.

It may well be, however, that in a certain, modified sense you're right in
saying I'm making too much of U.S. vs. European growth rates. If growth in
the EU  continues to accelerate, then I think this would increase the
evidence that the EU and US are both experiencing the same basic spurt
although with a lag in Europe's case.


-----Original Message-----
From: Dennis R Redmond <dredmond at OREGON.UOREGON.EDU>
To: marxism at <marxism at>
Date: Monday, November 01, 1999 11:19 PM
Subject: New Metropoles

>On Sun, 31 Oct 1999, Jose G. Perez wrote:
>> First, on the absolute level of per capita GDP (these figures are for
>> 1997 in 1997 dollars on a purchasing-power parity basis):
>Two points: first, PPPs are unreliable as a measure of GDP. That's because
>they're based on consumption power, not productive power; since the US is
>soaking up goods from abroad, we look richer by that measure (our current
>account deficit means, we're borrowing from abroad to pay for this).
>Second, long-term exchange rate trends show the euro/yen currencies rising
>vs. the dollar in the course of the 1990s. The euro has dropped a bit
>against the dollar, but given huge US trade and current accounts deficits,
>this is probably temporary.
>> GDP growth rates , population growth (these two from OECD), and the
>> resulting per capita growth rates 1990-1998. The figures for population
>> growth are for 1996-1997;  it is implicitly assumed in the calculation
>> that they have held steady for the entire period, which is close enough
>> for our purposes.)
>I'm not sure where the OECD got these population growth figures; the US
>population has grown at close to 1% per annum during the Nineties, from
>all the stats I've seen (World Bank, etc.), while EU population growth is
>far smaller (Germany experienced negative population growth in 1997,
>e.g.). Total per capita growth is indeed about the same between the US and
>the EU, leaving aside currency movements, which again favor the EU.
>> Japan is a totally different case. It has been in a decade-long
>> following the bursting of the "bubble economy." The elimination of the
>> fictitious capital and physical overcapacity generated during the bubble
>> has, evidently, not yet been completed.
>But per capita Japanese GDP is, at current exchange rates, something like
>$40,000 or so, thanks to currency appreciation.
>> As to the "import" of capital by the United States, there is another way
>> viewing this. And that is that foreigners invest their capital in the
>> because that is where it gets the best return, even taking into account a
>> premium for exchange risks.
>Meaning, profit rates are -- temporarily -- higher here. But as Adam Smith
>pointed out, interest rates and profit rates are always highest in
>countries which are going to ruin. Low profit rates can be offset by
>vast flows of fresh liquidity; the central banks of Japan and the EU are
>essentially doing just that.
>-- Dennis


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