Erm, no

In 2007 Britain was the most wealthy of the six leading economies in the world, even ranking higher than the United States, as measured by gross domestic product per person.

This is the most accepted – if crude – way of measuring a country\’s wealth, because GDP represents all the money the country\’s individuals and companies make each year.

Well, sorta, but still no. GDP per capita is indeed the measure used. But we don\’t use GDP per capita at market exchange rates,to compare said wealth across countries. We adjust for the fact that things often have different prices in different places. Tradable goods we expect to have the same, or at least very similar , prices everywhere (OK, maybe they\’ll differ by transport costs, tariffs….) but non tradable goods can vary widely. Land prices will certainly be influenced by population density and zoning restrictions, meaning that housing can vary wildly. Labour costs clearly change: all other things being equal a poorer society will have lower labour costs (err, pretty much a definition of a poor society, \’coz the poor don\’t make much money) meaning that services, largely dependent upon such labour costs will be cheaper.

We try to adjust for all of this, somewhat imperfectly, and so end up with GDP per capita at purchasing power parity (PPP). What\’s the number assuming that prices are the same, meaning that we can actually compare the standards of living?

At PPP rates, the UK in 2005 was number 12. I doubt that\’s changed all that much since.

I\’m sure there are stories all over the place about how Britain has dropped in the wealth tables.and all will be using the market exchange rate measurement. Which really isn\’t quite right: only 20% of our economy is internationally traded, so 80% is pretty much unaffected by such changes, which is another reason why we use PPP.

2 comments on “Erm, no

  1. The author of the article also seems to have difficulty distinguishing “wealth” (a stock) from “income” (a flow). The GDP/capita figures are a measure of income, not wealth. Yet Mr Wallop seems to think the figures are about wealth: “Britain was the most wealthy of the six leading economies …”

    He should change his first name from Henry to Cods.

  2. Tradable goods we expect to have the same, or at least very similar , prices everywhere …

    Except in the UK where a stereo, a pair of trainers, and a mountain bike (to take three random examples) will cost you three times as much as it does in the US.

    Tim adds: Trusih, but that’s because of exchange rates and the different prices of land for retail….which is what PPP tries to strip out.

Leave a Reply

Name and email are required. Your email address will not be published.