Purchasing Power
Kurt Brouwer September 8th, 2009
Great chart comparing GDP per person:
Source: Carpe Diem
I don’t normally think of the great state of Mississippi as an economic powerhouse, but compared to the European Union countries, it is doing very well. In fact, Mississippi scores higher (in terms of GDP or economic activity per person) than all of continental Europe. The only country over there that scores higher is the United Kingdom.
This comparison is based on purchasing power parity (PPP) which attempts to compare economies that have very different price levels for basic goods and services. The most famous example of using PPP is the Big Mac Index which is described by the Economist this way:
‘…[the Big Mac Index] is based on one of the oldest concepts in international economics, purchasing power parity (PPP), the notion that a dollar, say, should buy the same amount in all countries. In the long run, argue ppp fans, currencies should move towards the exchange rate, which equalises the prices of an identical basket of goods and services in each country. In this case, the basket is a McDonalds’ Big Mac, which is produced in more than 100 countries. The Big Mac PPP is the exchange rate that would leave hamburgers costing the same in the United States as elsewhere..’
So, even though a worker might make much less in Mississippi, for example, than in France., it could also be true that housing and even Big Macs could cost less too. Therefore, economists attempt to measure the relative size of two economies using PPP in order to get a more accurate picture of the economic activity of a given state or country.
- Economy , Geopolitics , Personal Finance
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I’ve been to the UK. It’s not that much better than Mississippi.
Fred: I have not spent much time in either place although I did spend a nice week golfing in Scotland back in 1995.
Your comment reminds me of a line from a vice presidential debate, which I’ll paraphrase, “I’ve known Mississippi and I’ve known the UK, and trust me, you’re no Mississippi.”
Mississippi is one of the poorer-performing states in the U.S. for GDP. For many folks, the idea that a relatively poor state in the U.S. would outperform all of continental Europe is shocking. Makes one wonder why many want to adopt the European regulatory framework doesn’t it?
Still and all, I bet the food — and definitely the wine and coffee — is better in Italy.
I think a better standard is productivity, or GDP per hour worked. (Let’s face it, work is overrated.) You can get that data very easily from the OECD for its member states. In addition I have productivity figures for an additional 20 nations that I computed from Groningen University data. By that standard in 2007 the US is ranked seventh behind Luxembourg (142.2), Norway (133.5), Ireland (108.4), Belgium (104.9), Netherlands (102.2) and France (100.6). The numbers in parenthesis are an index with the US equal to 100.
As for how the states measure up, just as adjustments for PPP matter, it’s important to take into account cost of living. The BEA has calculated what it calls regional price parities (RPP) for the states for the years 2005 and 2006:
http://www.bea.gov/scb/pdf/2008/11%20November/1108_spotlight_parities.pdf
I’ve computed my own estimates of 2007 productivity for the US states and when you correct for RPP using the 2006 estimates New Hampshire ends up ranking last in GDP per hour worked among the states (76.3). My home state of Delaware (154.6) ranks first, and Mississippi (95.7) thanks to its low cost of living actually ranks ahead of sixteen states including several states which have a high cost of living such as New Jersey (90.6), California (87.5), Hawaii (85.8) and Rhode Island (83.2).
Seventeen nations outrank New Hamphire in RPP/PPP adjusted productivity including all of the nations mentioned above plus Germany (94.7), Sweden (87.6), Austria (86.8), Iceland (86.2), the United Kingdom (84.8), Australia (83.4), Finland (82.2), Denmark (82.0), Canada (81.4), Switzerland (81.2) and Spain (80.2).
One more comment. I used to think that PPP only applied to currencies. But it turns out that PPP is computed for the Eurozone by the Eurostat-OECD PPP Programme. The methodological manual is available here:
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BE-06-002/EN/KS-BE-06-002-EN.PDF
Essentially they use Germany as the standard for purchasing power parity and make adjustments in terms of the “German Euro.” Thus correcting for RPP within the United States is actually methodically consistent.
Mark–Thanks for all the data and the links to various sources. Obviously, there are different methodologies for comparing countries economically. It is fascinating to think that the top-ranked U.S. state is Delaware (according to your statistics) and that it vastly outperforms all the EU countries. And, in this analysis Mississippi also does. Thanks.