>I think that's overstating the case. Most people know that an $18,000
>income in rural Mississippi would buy you a very different standard of
>living from $18,000 in Queens. A PPP exercise is an attempt to model that
>intuition more rigorously - without, of course, running into the
>complexities of exchange rates.
I might be for a purchasing power system - IF it tried to intuitive as you suggest. But in the World Bank's PPP world the Chinese worker makes 400% more than in the money world because PPP (in effect) assumes he could come to the U.S. and do the same work (or my example of the haircutter in Nairobi market). But, of course, the Chinese worker can't and that is one reason why he is poorer. He would hardly think it intuitive or commonsense to assume he could. The Chinese have been made to look four times richer (than some other comparison) by assumptions that do not exist for them as real options and thus partly excuse away their poverty.
In our European example, since the PPP assumes the U.S. as comparator of course the Europeans (or the Japanese) look a lot poorer - assumes they are trying to live like Americans in an American life-style. But simply reverse the assumption - how does the U.S. economy look if you assume Americans make all their purchases trying to live a European lifestyle? (Hint: French staples include near-universal quality child care and fresh croissants for everyone.) You begin to see how biased and arbitrary the PPP becomes.
>But doing international comparisons does run into the exchange rate
>problem. $18,000 = EUR 21,780 at yesterday's close, but what kind of life
>would those market-identical amounts buy you in, say, Amsterdam vs.
>Chicago? A normal person (i.e., a noneconomist) considering the question
>might ask, "Well what's rent? Food? Gas?" And PPP programs try to answer that.
Well, no it doesn't that is the point. It tries to see what that Chinese or Europeans life would be like if he lived in the U.S., like an American. A different question that was developed for a different purpose (intl trade theory) and foolishly applied by bureaucracies for this purpose because "it would sell". For example, instead of comparing the price of gas (and making the Europeans seem poor since they pay so much), one should ask about the price of transport (they have mass transit systems) and time spent. And of course it doesn't show disposable income and almost never the distribution of income, or even the median. It only pretends to answer the innocent and honest question you raise - how do I compare these two different economic lives?
>There are lots of problems - defining market baskets, defining comparable
>products, valuing social services. But I don't think it's fatally flawed
>from the outset.
>
>Doug
>
>PS: I'd also add that PPP has the fortunate side-effect, from an elite
>perspective, of making the poor seem less poor. Are Chinese incomes 3% of
>U.S. incomes (which they are on market exchange) or 12% (PPP version)? Or
>somewhere between? Or can we not say because the whole effort to compare
>is fucked?
Fair question. I would say:
- Start by admitting this is apples vs. oranges. There will not be one phony number that psuedo-answers the question. This is more professional but also brings us closer to a larger social truth: that we are comparing different lifestyles that might offer pluses and minuses. People should have wider choices than they might think.
- Ideally use actual material comparisons from a range of viewpoints. Life expectancy, morbidity, education, as well as transport, caloric intake (for 3rd world), material goods, leisure time, etc. Always show distribution (at least disparity rates or lowest percentile), percent having access (for services) and, where relevant gender disparity.
- Nat. income at exchange rates (some World Bank and UN tables used to use 5 yr. rates) can be as unsatisfactory as PPP. But its shortcomings are more transparent. In either case one is comparing national economies (really, national GDPs) NOT actual economic lives. In one measure of economic power - an economy's potential 'purchasing power' for international goods, exchange rate figures are far better.
- for countries with better stats use a bilateral ppp (European PPP in US terms, US PPP in European terms), show the two side by side or split the difference. This will not give "accuracy" and there is no reason to think that the discrepancies will be balanced - but it is less ludicrous. (Obviously not practical for multi-country comparisons.)
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