Market and PPP measures of GDP

Ian and the former head of the OECD statistical division, David Henderson, were the authors of an influential criticism of the IPCC’s projections for global growth in 2004. They showed that the IPCC emissions scenarios, which used on MER estimates of the growth ‘gap’ between developed and developing countries, implied growth in global output (and hence, CO2emissions) that was far too large. The UK Parliamentary Committee to whom they presented their case accepted their criticism of the IPCC scenarios. The IPCC was, predictably, less responsive to their constructive criticism.

You may be wondering why, if the MER basis is an inaccurate way to measure and compare output and growth, the World Bank (especially, but also the IMF and OECD in some publications) use it. The answer, as explained by the IMF staff, is that it is “too hard” (!) to estimate accurate PPP weights for the prices of goods and services, especially if they are not traded. This makes it seem that some of the international financial institutions would rather be wrong than over-budget.

Update: In fact, it is very difficult for some not-so-obscure reasons teased out by Brian Fisher and Hom Pant in this ABARE Conference Paper on the PPP versus MER debate. Here’s the abstract: it’s a short paper and worth reading.

“Is PPPE a better measure than MER to compare real incomes across nations? Would emissions projections necessarily depend on which measure of exchange rates we use to compare real incomes? This paper seeks to answer these questions. It examines the conceptual and empirical basis of the PPP theory and concludes that PPPE is based on a set of very restrictive assumptions which (except one) are relaxed in MER. In fact, MER is a generalisation of PPPE. One can make a consistent comparison of real incomes by using the real exchange rate, which is a ratio of MER to PPPE, not by using just the PPPE or MER. MER, however, can be used to convert nominal current incomes from different currency units into units of a reference currency and the prices in reference currency units can be used to deflate the nominal incomes into constant price incomes to make valid real income comparisons across nations. Finally, it is argued that comparison of real incomes is not always necessary in making emissions projections. “

One Comment

  • Peter,

    In my opinion, Hom Pant and Brian Fisher are wrong to believe (if they still do) that

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