1. Lecture 3. PURCHASING POWER PARITIES
Economics 1490
THE WORLD ECONOMY:
GROWTH OR STAGNATION?
with
Professor Dale W. Jorgenson
Lecture 3. PURCHASING POWER PARITIES
September 7, 2017
Harvard University Department of Economics
Fall 2017

2. THE WORLD ECONOMY:
GROWTH OR STAGNATION?
A. Comparing Economies
B. U.S. Crisis and Recovery
C. European Slowdown
D. Asian Economic Miracles
E. Sustainability of Economic Growth
F. World Economic Outlook

3. A. COMPARING ECONOMIES
1. Course Description
2. The World Economy since 1990
3. Purchasing Power Parities
4. Sources of Growth
5. Globalization and Competitiveness

4. THE INTERNATIONAL COMPARISON PROGRAM
Originated in 1968; Available at Approximately 5-Year Intervals
Provides Purchasing Power Parities among Countries
The 2011 Version Includes 199 Countries and Combines Two Studies:
Eurostat/OECD: 47 Countries
World Bank: 152 Countries
Today We Consider Applications to Productivity Measurement; Later We Consider Applications to Poverty Measurement and Sustainability

5. PURCHASING POWER PARITIES
A purchasing power parity between two countries, A and B, is the ratio of the number of units of country A’s currency needed to purchase in country A the same quantity of a specific good or service as one unit of country B’s currency will purchase in country B. PPPs can be expressed in the currency of either of the countries. In practice, they are usually computed among large numbers of countries and expressed in terms of a single currency, with the U.S. dollar (US$) most commonly used as the base or “numeraire” currency.

6. EXAMPLE: THE BIG MAC INDEX

7. THE BIG MAC INDEX
If a Big Mac hamburger costs 4.00 U.S. dollars in the United States and euros in France, then the PPP for a Big Mac from the French viewpoint is 0.83 U.S. dollars to the euro. From the American viewpoint, it is 1.20 euros to the U.S. dollar.
This means that for every euro spent on Big Macs in France, it would be necessary to spend 0.83 U.S. dollars in the United States to obtain the same quantity and quality of Big Macs. Conversely, for every U.S. dollar spent on Big Macs in the United States, it would be necessary to spend euros in France to obtain the same quantity and quality of Big Macs.

8. AIM OF THE INTERNATIONAL COMPARISON PROGRAM
FROM BIG MAC TO THE ICP
The aim of the ICP is to produce PPP’s that take into account the relative prices among many countries for a broad range of goods and services, including not only consumer products but also capital and government expenditures, which together make up the GDP.

9. STEPS IN ESTIMATING PURCHASING POWER PARITIES
The Conceptual Framework is Provided by the GDP, As Defined in the United Nations System of National Accounts This Is the Standard Definition of the GDP Used by All Countries.
The Basic Data for Purchasing Power Parities Consists of Prices in National Currency and Relative Expenditure Shares of All Products Included in the GDP for Each Country.
PPP’s Are Estimated for Individual Products, 155 Basic Headings, Components of the GDP, and the GDP Itself.

10. PRICES OF INDIVIDUAL PRODUCTS AND BASIC HEADINGS

11. PRICES OF BASIC HEADINGS AND COUNTRIES

12. PRICE LEVEL INDEXES

13. SIZE OF ECONOMIES
High-Income Countries Account for About Half of World GDP, But Under 18 Percent of World Population.
The United States Remained the World’s Largest Economy, Closely Followed by China. India Is the World’s Third Largest Economy, Followed by Japan.
Six Middle-Income Economies Are Among the World’s Twelve Largest Economies: China, India, Russian Federation, Brazil, Indonesia, and Mexico.
The Eurostat-OECD Region Becomes Significantly Smaller Using PPP’s, While the Asia-Pacific Region Becomes Significantly Larger.

14. PERCENTAGE OF GDP BY INCOME GROUP

15. LARGEST ECONOMIES IN TERMS OF PURCHASING POWER PARITIES

16. LARGEST ECONOMIES, PERCENTAGE OF U.S. GDP

17. GDP REGIONAL SHARES

18. SHARES OF WORLD GDP

19. REAL GDP PER CAPITA AND POPULATION

20. MEASURING THE PRICE LEVEL
A price level index (PLI) is the ratio of a PPP to a corresponding exchange rate. PLIs are used to compare price levels between economies. They indicate the price of GDP (or its components) in an economy if it were “purchased” after acquiring local currency at the prevailing exchange rate. PLIs are generally low in the poorer economies. This reflects the common experience of travelers who find many (but not all) of the goods and services in the poorest economies relatively cheap compared with similar products in their home economy.

21. PRICE LEVEL INDEX VERSUS GDP PER CAPITA

22. REGIONAL AVERAGE PRICE LEVEL INDEXES

23. REGIONAL AVERAGE EXPENDITURES PER CAPITA

24. PURCHASING POWER PARITIES: SUMMARY
The International Comparison Program Is the Largest and Most Complex International Statistical Program in the World
The Aim of This Program Is to Compile Purchasing Power Parities for the GDP and Its Components for 199 Countries of the World
Purchasing Power Parities Are Essential for the Measurement of World GDP and Its Components and the Corresponding Concepts by Size of Economy and Region
Purchasing Power Parities from the International Comparison Program Can Be Compared with Exchange Rates by Means of Price Level Indexes