Gross national product ; Income ; Purchasing power parity

Reuven Glick

English

Research Papers in Economics

FRBSF WEEKLY LETTER
Number 91-34, October 4,1991
International Output Comparisons
Is the u.s. in long-term economic decline?
Many would point to the narrowing of income
level differences between the United States and
other industrial countries during the post-World
War II period as evidence that it is.
But comparisons of output levels across coun-
tries are problematic: They require converting
the national output levels of individual countries
to a common currency, such as the dollar; and
without proper adjustment for the relative pur-
chasing power of different currencies, interna-
tional output comparisons can be subject to
serious distortions.
This Letter discusses the methodology of making
output comparisons across countries and reviews
the facts concerning U.S. economic growth rela-
tive to other large industrial countries during the
postwar period. It shows that, while the relative
economic importance of the u.s. has changed
in the last 40 years, the per capita output level
of the U.S. still remains above that of other
countries. Moreover, U.s. economic growth
throughout the postwar period has been quite
respectable by historical standards, especially
in the 1980s. The narrowing gap between output
levels in other industrial countries and the u.s.
is attributable to a foreign growth surge that
occurred primarily in the 1950s and 1960s.
The methodology of output comparisons
Almost all countries construct national income
and product statistics to measure their national
output and income levels. The accounting meth-
ods that underlie these statistics have generally
been standardized throughout the world. Na-
tional product statistics allow direct comparisons
of output performance over time within a given
country. For example, the national product fig-
ures of the United States allow the comparison
of the u.s. output level in 1990 with that in
previous years.
Converting national output levels of different
countries to a common currency to make com-
parisons among countries is more problematic.
Comparing U.S. and Japanese output levels in,
say, 1980 requires converting Japanese national
output levels to a common currency, such as the
dollar. Typically this conversion is done using
bilateral exchange rates.
However, using the exchange rate to compare
national output levels implicitly assumes that the
exchange rate reflects purchasing power parities
among currencies and that prices in terms of a
common currency are equal everywhere. Thus,
for example, using the yen-dollar exchange rate
to convert Japanese income measured in yen into
dollars presumes that the number of yen required
to buy a dollar on the foreign exchange market
also buys the same amount of goods as a dollar.
In fact, this is not generally the case. Even
after adjusting for transportation and other costs,
many goods are priced differently in different
countries. One obvious explanation is that goods
are not identical across countries, so that com-
paring the prices of those goods can amount
to comparing apples and oranges. Inaddition,
many goods and services (whose prices are in-
cluded in a measure of a country's price level)
are not traded across borders. Housing, land, and
services such as haircuts and golf lessons, for
example, are not traded goods. The prices of
these nontraded goods are therefore likely to
differ across countries.
Even for many apparently identical goods,
international prices differ. Big Mac hamburgers,
for example, are made locally in more than 50
countries and look and taste virtually the same
everywhere. Nevertheless, differences in Big Mac
prices can arise because, even though meat may
be internationally traded, the costs of labor and
other inputs used to prepare and serve Big Macs
are not traded. According to the Economist mag-
azi-ne (May 5, 1990) the average price in the
U.s. of a Big Mac in 1990 was about $2.20; in
Germany the price was DM 4.30. Given the pre-
vailing $/DM exchange rate of $.60/DM, this im-
plied a dollar equivalent price of $2.50 for a Big
Mac in Germany, almost20 percent above the
price in the U.S. The corresponding price for
a Big Mac in Tokyo was $2.33.FRBSF
The exchange rate, then, tends to understate or
overstate the purchasing power of one currency
in terms of another. Therefore, using exchange
rates toconvert a country's gross product to dol-
lars, for example, can overstate or understate that
country's real product. Thus, if the number of yen
required to match the purchasing power of the
dollar over goods is overstated by the yen-dollar
exchange rate, Japan's real income relative to that
of the u.s. is correspondingly overstated as well.
Such distortions are particularly troublesome
in periods when exchange rates are volatile. Year-
to-year changes in exchange rates between ma-
jor currencies of 20 percentor more have been
observed since the early 1970s, particularly since
1985. Because most of these large changes have
been unrelated to price movements of national
outputs, exchange rate conversions necessarily
have at times given erroneous measures of the
relative output levels of countries.
Comparing the comparisons
To overcome these problems in making output
comparisons, Kravis, Heston, and Summers have
constructed relative purchasing power parity
measures of currencies to convert the gross do-
mestic products (GOP) of individual countries to
dollars. (See Kravis, Heston, and Summers 1982;
Summers and Heston 1991.) These price parity
measures are derived from unique price data on
identically specified goods and services in each
country collected through the U.N. International
Comparison Program. Chart 1 presents indexes of
real per capita GOP levels in five large industrial
countries relative to that of the u.s. in 1950,
1973, and 1988 using these data. (Later data
are not available.)
Chart 1
Relative Per Capita Real Output Levels
Purchasing Power Adjusted
(U.S. = 100)
~lJ- ~~i ~~ u.s. Japan Germany France Italy UK
11950 01973 1988
Percent
100
80
60
40
20
o
These data indicate that the economic positions
of the U.S. relative to the rest of the world has
indeed changed dramatically in the post-World
War II period. In 1950, Germany's GOP per cap-
ita was one-half that of the U.s.; Japan's GDP per
capita was one-sixth of the u.s. Since then, per
capita growth in the rest of the world has con-
siderably narrowed the u.s. lead. In 1988, Ger-
many's real per capita GOP had risen to 84
percent of the U.S. figure; Japan's had risen
to 78 percent.
Chart 2 presents corresponding data on relative
output levels computed using bilateral dollar ex-
change rates to make output comparisons. These
figures concur in indicating significant foreign
growth abroad relative to the U.S. since 1950.
However, the exchange-rate-converted output
figures generally overstate relative foreign output
performance in the 1970s and 1980s. In 1988, for
example, they indicate that per capita real output
in Japan exceeded that in the u.s. by 20 percent,
and that per capita output in Germany equaled
that in the u.s. The reason is that because of the
sharp appreciation in the yen, OM, and other
major currencies against the dollar after 1985, the
bilateral exchange rates used to make the com-
parisons overstated the purchasing power of
these currencies relative to the dollar. Thus the
exchange-rate-adjusted output measures exag-
gerate the growth of foreign output levels in the
last decade. The Kravis-Heston-Summers figures
reported in Chart 1 present the more accurate
picture of relative output levels.
Why is the gap narrowing?
While u.s. per capita output levels still exceed
levels abroad when properly measured, the gap
clearly has narrowed over the last 40 years. Does
this trend indicate that the u.s. is in long-run
economic decline? In fact, much of this narrow-
ing of output gaps reflects a growth surge by the
rest of the world, rather than a major growth
slump in the u.s.
During the periods 1950-1960 and 1960-73
U.s. real GOP growth averaged 3.3 percent and
4 percent a year, respectively. (Real per capita
growth averaged 1.5 percent and 2.7 percent,
respectively.) These figures compare favorably
with u.s. historical experience. It is estimated
that u.s. annual GOP growth was 3.5 and 2.7
percent for the periods 1900-1925 and 1925-
1950, respectively. (Average annual per capitaGOP growth was 1.7 percent and 1.6 percent
over the same periods.)
During the 1950s and 1960s the growth of other
industrial economies was exceptionally high. For
example, between 1950 and 1973 Japan's real
GOP grew roughly 9 percent a year. Germany's
GOP grew by 8.4 percent annually between
1950 and 1960 and by 4.4 percent between
1960 and 1973.
There are several explanations for this foreign
growth surge. In part it can be attributed to the
opening of world trade and economic relations
and catch-upgrowth by foreign industrial coun-
tries following the devastation ofWorld War II.
A number of researchers have emphasized the
role of competitive forces that have generated a
steady transference of technology from the u.s.
to other countries.
n
~
r-
~
r-
• I •
This does not imply that current or recent past
rates of U.S. output growth are the highest that
can be achieved. However, it does suggest that
u.S. performance through the 1980s has not dis-
played any evidence of long-term output growth
slowdown.
Reuven Glick
Research Officer
3.3 percent exceeded that of all other large in-
dustrial countries except Japan's 3.6 percent rate.
On a per capita basis, only Japan and the U.K.
have displayed somewhat better performance
than the U.S. during the 1980s.
Conclusions
A long-run view of u.s. economic performance
indicates that u.s. economic growth in the post-
war period has been quite respectable by his-
torical standards. While growth in most other
countries surged in the postwar period relative
to the U.s., this surge occurred primarily in the
1950s and 1960s. There is no evidence that the
associated convergence of worldwide growth
rates has been damaging to the United States.
In the 1960s, when foreign economic growth ex-
ceeded that in the u.s. by a wide margin, Amer-
ican output grew faster than at any time in U.s.
history. Moreover, in the past decade u.s. growth
performance has been comparable or superior to
that abroad.
o
20
40
Percent
120
100
80
60
UK U.S. Japan Germany France Italy
• 1950 0 1973 1988
(U.S. =
Chart 2
Relative Per Capita Real Output Levels
EX4:hange Rate Adjusted
In the period 1973~80, while most industrial
countries experienced a growth slowdown as a
result of oil shocks, growth abroad continued to
exceed that in the U.S. Since 1980, however, u.s.
growth has been comparable or superior to that
abroad. Despite some rebounding from the ef-
fects of oil shocks, foreign growth remains far
below rates experienced in the 1950s and 1960s.
In terms of annual GOP growth, the u.s. rate of
References
Kravis, Irving, Alan Heston, and Robert Summers.
1982. International Comparisons of Real Gross
Product. Baltimore: Johns Hopkins University Press.
Summers, Robert and Alan Heston. 1991. "The Penn
World Table (Mark 5): An Expanded Set of Interna-
tional Comparisons, 1950-1988:' Quarterly Journal
of Economics (May).
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Index to Recent Issues of fRBSf Weekly Letter
DATE NUMBER TITLE AUTHOR
3/29 (91-13) Banking and Commerce: The Japanese Case Kim
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4/12 (91-15) Depositor Discipline and Bank Runs Neuberger
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The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December.

International output comparisons

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