International comparisons

Not that long ago, international comparisons of income levels and so on were always done using market exchange rates. If this were still the standard practice, there would be some surprising news to report. On an exchange rate basis, Australia has a higher GDP per person than does the US (I’d guess the same would be true of more relevant measures like national income per person, though the gap would be a bit smaller because of our greater indebtedness).

Currently US GDP per person is around $US 44000. Australia’s is about $A51 300, which at a market exchange rate of 0.93 converts to about $US47700.

Before we break out the champagne, I’ll point out that these exchange rate comparisons aren’t really useful – this is obvious given that the $US/$a rate was heading for $0.50 not long ago, and is now headng for parity . Standard practice these days is to use a “Purchasing Power Parity” measure, based on the estimated relative cost of a standard bundle of goods and services. The estimated $UA/$A rate is around 0.70 which leaves us a fair way behind the US.

Although PPP estimates are better than those based on market exchange rates, they shouldn’t be treated as exact. They are statistical estimates, with a large margin of error, and the underlying economic theory (revealed preference) implies that even with perfect data, there is always a range of possible values for index numbers like this. Typical international comparisons should be taken to have a margin of error of 10 to 20 per cent.

In passing, a useful tip for students of the economy. If you want a round number estimate of the magnitude of any economic variable, you can approximate GDP as $1 trillion, population as 20 million, and income per person as $50 000. These will be accurate to within 10 per cent for another year or two.

Update In comments, Matthew Turner reminds me that he’s been making this point for years. I think I came up with it independently, but he was certainly first. Interestingly, Matthew calculates that the critical value for the euro/$ exchange rate, at which euro GDP per person exceeds US is $1.46. Yesterday, it hit 1.457.

32 thoughts on “International comparisons

  1. Americans spend $2-3,000 a year more on health care than do Australians with little or no evidence that that extra money actually improves quality of life. (it certainly doesn’t increase life expectancy.)

    If we deduct that wasted expenditure from the average US consumer’s spending then consumption levels are probably pretty much identical.

  2. I’m not even sure how relevant the PPP measures are at the individual level, since there’s huge variance depending on what the “average” happens to mean to you. If you’re single, for example, living in cities with expensive rent but cheap everything else (like many cities in Asia) is probably not going to be a fuss, since you can potentially live in a small comparitively cheap place. Thus other components are more meaningful. Alternatively, if you have 3 kids, a reasonable place might be prohibitively expensive and the fact that everything else is cheap doesn’t matter. Thus the PPP measure is the same for both parties, but the real price of living is completely different.

  3. i thought the professional’s estimate of relative purchasing power was the median wage divided by the price of a mcfish burger…

  4. My RPP = 5000 McFish Burgers… good work Al.

    Interesting philosophical question though… does GDP/person really have any meaning in terms of quality of life, when we compare countries like the US and Australia?

    It certainly makes a difference when you compare, say, the Phillipines and Australia, or Bangladesh and Japan. But once GDP/capita is above a certain threshold, does increasing that measure still correlate to an increase in quality of life? Or do people start to place greater personal weight in OTHER, non-monetary sources of value – family, relationships, availability of leisure time, environmental quality etc…

  5. Well the simple problem is that the figures, as means, may well be statistically quite correct but they tell us little about whether Americans, as opposed to America, are richer or poorer. What about modal and median wealth? How do we compare?

    And that’s before we even get into HDI versus GDP measures.

  6. Anna K, it isn’t a philosophical question. All you need to do is identify things that you wouldn’t have otherwise depending on how much you want to forgo (expensive medical treatment, for example, or bigger picture things, like science industries that you can work in, keeping educated workers, like teachers, in your country etc.). You also need to consider what people unluckier than you think (I doubt people on unemployment benefits would be too pleased to forgo 10%, for example).

    Even simpler is to compare what small differences make across countries. The easiest comparison is New Zealand. There are essentially no cultural barriers stopping these guys moving to Australia and they don’t earn that much less than Australians (NZ is also a physically lovely country). So why do so many Kiwi’s come to Australia? Its because the extra wealth Australia has makes it a better place in innumerate ways.

    There are specific examples you can identify too if you want. Last time I checked, 50%(?) of kiwi medical students said they intended to move overseas (despite doctors being paid well in NZ). It seems reasonable to suspect that this means, despite the smallish diference in GDP per citizen, NZs health will fall to pieces in the next few decades — moreso than Australia.

    So its easy to identify the type of things money buys you. Maybe you don’t think, say, 20%, is a big deal, but it is a big deal. Looking at where people vote with their feet given the chance confirms this — despite the extra costs associated with moving.

  7. Also AnnaK, I don’t have the research right in front of me (someone does), but happiness research is suggesting that about about $20 000 GDP per year, happiness is pretty much not determined by absolute wealth, but relative wealth. Having satisfied all of our material needs, we like the extra money just to show off our status. Countries that have actively pursued egalitarian policies and sought to minimise heterogeneity are happier, more satisfied with life, on all sorts of meaningful levels.

    Maybe the Kiwi Doctors want to move to Australia because they can be seen as a success that way. It’s a funny world.

    (Of course one of the small issues with this approach is that it works better with homogeneous societies that can tend towards apparent racism (oh god please don’t summon Jack Strocchi)).

  8. i think if ozzies are innumerate then kiwis come here to be illiterate.

    in advanced countries, most people take in washing. with it’s proportionately much bigger primary industry, oz can support more washermen and women and on a higher wage. those clever kiwis figured this out with their proportionately numerate hands (six fingers each, result of intensive breeding program).

  9. The other point to consider is where that GDP is consumed.

    As I understand it and according to statistics on the Gini coefficient, inequality in the United States is considerably greater than it is in Australia.

    I don’t consider it a major policy goal to further improve the lifestyles of the already wealthy.

  10. Pr Q says:

    Standard practice these days is to use a “Purchasing Power Parity� measure, based on the estimated relative cost of a standard bundle of goods and services. The estimated $UA/$A rate is around 0.70 which leaves us a fair way behind the US.

    If my memory serves me Pr Q has been putting the PPP of AUD$1.00 at USD$0.70 for most of this decade. This is still about right. The Pew Tables as of 2004 put the USA-AUD PPP at US1.00 = AUD1.40 which is equivalent to AUD1.00 – USD 0.70.

    Over this period there has been an almost 100% appreciation of our currency. Almost 25% of our goods are imported.

    But our currency has not appreciated so much against the TWI of a representative basket of currencies. And imperfect competition may mean much of this cost reduction may not have been passed on to consumers. According to the ABS as of 2006:

    The strong growth in Terms of trade over the past six years reflected over 24.3% growth in Export prices and a fall in Import prices of 12.3%.

    Shouldnt our PPP improve with the improvement of terms of trade, given our high propensity to consume imported goods? Or am I jumping the gun or missing something?

  11. wilful Says: <a href=”https://johnquiggin.com/index.php/archives/2007/11/06/international-comparisons/#comment-200111November 6th, 2007 at 1:54 pm

    (Of course one of the small issues with this approach is that it works better with homogeneous societies that can tend towards apparent racism (oh god please don’t summon Jack Strocchi)).

    I gather remarks like “homogenous societies that tend towards racism” are directed against countries like Finland and Taiwan who seem to be infuriatingly complacent and smugly self-satisfied about maintaining their insular monocultural ways. Shame on these wicked people for visiting such evil on the world!

    It makes a lot of sense to minimise class and cultural divisions if you want a happy community. That is what comm-unity means: communal unification. There is little hope for a shared morality or even just pottering along unless there is good comm-uni-cation.

    However it is now considered an unpardonable faux-pas to even mentions such things. Apparently pattern recognition with respect some forms of diversity is now “racism”. On this logic farmers speculating on the lousy precipate potential of wispy cirrus clouds hovering in the distance now risk a suit being brouht against by HREOC on the grounds of their rotten “cloudism”.

    But its pointless to expect post-modern liberals to be interested in the foundations of moral philosophy or other trifles. They have much bigger fish to fry.

    The status-conflict between inner-urban, uni-educated apartment-dwelling, child-less, black-clads versus sub-urban, tafe-educated, McMansion-dwelling, childful, red-necks flares up regularly, especially as the former aspire to economic advancement. So an absolutely uncompromising committment to ethnic “heterogenity” is an indispensable ideological fashion accessory if you want “a good look”.

    It is indeed “a funny world”.

  12. You see jack, politely, I think you’re a small minded xenophobe who likes to misuse broader theories and research to support your view that Australia should be tediously whitebread. Your capacity to extrapolate ‘facts’ that accord to your worldview from limited indications is legendary.

    But, having encountered you on this board many a time before, you wont hear another peep out of me in this thread, since you also have a capacity to write more and to go on and on and on about an idea that is tedious.

    With that, I’ll shut up. No I wont be responding.

  13. wilful Says: November 7th, 2007 at 9:46 am

    You see jack, politely, I think you’re a small minded xenophobe who likes to misuse broader theories and research to support your view that Australia should be tediously whitebread. Your capacity to extrapolate ‘facts’ that accord to your worldview from limited indications is legendary.

    FWIW, as a matter of fact, I support a race-neutral high-immigration policy where candidates are selected for the ethical and economical contribution to the nation. I welcome people of all races – black, white or brindle – so long as they make an effort to fit in and play by the rules.

    Also, I dare say the diverse kinships, friendships and work-shops of my “small minded xenophob[ic]” past would stack up pretty well against the sheltered existence of the leafy- and sandy-suburb clinging apostles of “diversity at all cost”. But such back-patting is probably in bad taste so perhaps I will leave it at that.

    It is also a matter of fact that Howard’s immigration-integration program has achieved the dream ticket of developing a high-flow NESB policy whilst maintaining a high level of ESB polity support. If this is “tediously whitebread” then perhaps you would prefer the to live in “vibrantly diverse” ethnic melting pots such as Bahgdad, Sri Lanka, Londonistan, Yugoslavia et al.

    I am quite happy to have my “capacity to extrapolate ‘facts’ that accord to [my] worldview from limited indications [to be considered as] legendary” so long as subsequent observation of facts accords with such extrapolations. My prediction, made since early noughties, that integration would trump differentiation as the core civic value is looking pretty good. Does wilful have any testable predictions or is he “all hat and no cattle” in the scientific-stakes?

    My guess is that matters of fact are of little importance to people who prefer moral posturing to moral progress.

  14. labor-units should be measured on sound economic values such as ‘in-house-production’ vs ‘out-sourcing’, with due regard for the utility of socializing cost while privatizing profit.

    however, labor-units must have a mutually understood language suitable for industrial use, and as they are commonly dual-use consumer-units as well, they need a language capability suited to understanding advertising. this need for a standardized language has been met, and it has now thoroughly replaced the english language from which it was extracted.

    newspeak is particularly suited to commerce, in as much as it is quickly learned by units from diverse breeding stations, allowing labor sourcing and consumer replacement from low-cost sources.

    the ongoing introduction of ‘big brother’ as the paternal overseer is well advanced among the young units, and residual political customs can be erased without disquiet. bb smiles on us! ++good!

  15. GDP can have remarkably little relation to quality of life. Luxembourg has a PPP GDP 175% that of the US, but it’s HDI is lower, and only marginally above that of Italy, with a PPP about 70% of the US. Sweden’s PPP is two thirds of the US, but its HDI is slightly higher. The differences become very important for developing countries: China’s PPP is less than half that of Saudi Arabia, but their HDIs are almost the same, etc. These are pretty narrow measures of quality of life (education and health), but they do seem to be rather important ones.

  16. In comment 1, Ian Gould said: “Americans spend $2-3,000 a year more on health care than do Australians with little or no evidence that that extra money actually improves quality of life. (it certainly doesn’t increase life expectancy.)”

    Is there any evidence to support this? Specifically, does anyone know of a rigorous study that looks at the effects of US health care spending holding other variables (eg lifestyle factors, homicide rates) constant?

  17. “Specifically, does anyone know of a rigorous study that looks at the effects of US health care spending holding other variables (eg lifestyle factors, homicide rates) constant?”

    There are approximately 4,000,000 deaths in the US every year – including around 10,000 homicides.

    I think we can discard homicide as a major factor.

    It’s difficult to see what “lifestyle” factors could explain why the average US life expectancy is on par with Cuba’s.

    That’s 2 years less than the average Canadian and 3 years less than the average Australian (to cite the two countries probably most similar to the US in terms of culture and lifestyle.)

    Yes you haver more immigrants (to take one theory often cited) but the average immigrant would have to live about 20 years less than the US average to explain that differential.

  18. More importantly, for most comparative purposes, it doesn’t much matter how low life expectancy is caused. Causation is certainly not relevant in looking at the question “who has hte higher living standard”. And, unless you can attribute the cause to something that is location-specific, or deeply embedded in the culture, it’s also not relevant to the question “whose socio-economic system delivers the best outcomes”.

  19. All I know is, it’s them post-modern liberals that are always travelling overseas to check on the facts and apologise for their xenophobia, while them McMansion types happily stay home and work and play together because they’re relaxed and comfortable with the answers.

  20. robert merkel, there is no suggestion that Luxembourg isn’t a pleasant place to live. The only issue is whether, and to what extent, per capita GDP is a good indicator of quality of life.

  21. Regarding Ian and John’s comments (19 & 20), I would have thought that overeating was a lifetsyle factor that would differ significantly between the USA and Cuba*. Further, it is relevant to determining the country’s real standard of living because, if Americans are choosing a high consumption lifestyle that has the byproduct of causing them to get sick and shorten their lifespans, and as part of that deal are choosing to pay for the associated health costs, then this is simply a consumption decision – and it would mean that life expectancy was a poor indicator in this case of standard of living in the economic sense.

    Tom

    * Thanks for your data on homicide’s, Ian. I accept that they are insufficient to sway the stats.

  22. Tom N, malnutrition is more likely to be a cause of early death than overeating. In any case the so-called ‘epidemic’ of overeating in the US is hugely over-rated. Only gross obesity actually shortens life expectancy and recent research suggests that the ‘merely overweight’ tend to live longer than thin people. Gross obesity prevails among a tiny percentage of the US population and is not usually ascribed to ‘consumption decisions’. Distributional factors seem to me a far more likely explanation – including, but not exclusively, the distribution of access to good health care.

  23. OECD and WHO studies consistently find the US gets very poor value for their health dollar, as measured by outcomes. They waste most of the money on very high administrative costs (because of the plethora of insurers), on doctors’ earnings (well over double those of most developed countries), on tort lawyers and on inflated profits for pharmaceutical companies.

    For a very short presentation comparing outcomes for the US, Canada, Australia and others, try this.

    THe really amazing thing is that US public spending on health is bigger than ours (6.5% of GDP vs 5.6%). Where is all that money going?

  24. I don’t what planet you live on melanie, but on the one I do, 35% or so of the population is obese in the US, and obesity leads to things like diabetes, high blood pressure, sleep apnia etc. In case the drugs are good enough now to stop obsese people dieing a lot earlier than the normal population, then thats great.

  25. Thanks for your thoughts in comment 24, Melanie – they may well be correct. However, I was hoping that someone could point me to a study of the various issues involved, as it seems to me that simply comparing health care expenditure with life expectancy is a fairly superfiscial way of determining the effectiveness or otherwise of health care, and is particularly fraught when being used as a means of assessing standard of living.

  26. jquiggin Says: November 8th, 2007 at 6:10 am

    More importantly, for most comparative purposes, it doesn’t much matter how low life expectancy is caused. Causation is certainly not relevant in looking at the question “who has hte higher living standard�. And, unless you can attribute the cause to something that is location-specific, or deeply embedded in the culture, it’s also not relevant to the question “whose socio-economic system delivers the best outcomes�.

    I disagree. For comparative purposes you must make apples to apples comparisons. The USA’s demographic composition is massively different to the USE’s. Near to 30% of the population is Mestizo or African in heritage. These ethnic groups have a markedly different health profile to Caucasians.

    The problem with US health care can be traced back to institutional social structures and individual biologocal natures. I daresay I will cop a storm of abuse for pointing out these facts, from both New Rightists and New Leftists. But the facts more or less speak for themselves.

    THe US’s private institutions are dysfunctional at health care: inefficient and inequitable. THey are inefficient at provision due to excessive bureaucracy and spurious technology, inequitable at delivery due to risk-averse refusal of sick clients.

    But the US’s private individuals are also somewhat dysfunctional in their health care efforts. Minorities take relatively poor care of themselves due to their relatively lower IQ. This “intelligence effect on health” is still pronounced, even controlling for SES (which itself corresponds positively to IQ).

    Minorities tend to pursue unhealthy life-styles and not conform to medical prescriptions. THis is evident in their much higher rates of addiction to drugs and junk food. No one forces them to do this.

    Also, minority geneology is even less well-adapted to the temptations of affluence. They are also more prone to cardiac and carcogenic diseases of affluence, whatever their life-styles and environment. It is generally assumed that diverse drug reactions are caused by diverse genetic endowments.

    To improve the health outcomes for minorities we need to account for what is causing their sub-par performance. That would require doing genetic and psychometric analysis. But we have seen from the Watson brouha that anyone who does this is committing career suicide.

    Liberal-leftists appear to prefer to sacrifice the lives of individuals they feign to care for rather than give up their “social constructivist” ideology.

  27. “Minorities take relatively poor care of themselves due to their relatively lower IQ. This “intelligence effect on healthâ€? is still pronounced, even controlling for SES (which itself corresponds positively to IQ).”

    And to think I always thought that the main reason East Asians live longer than whites in rich countries was due to diet (white people eat too much garbage). Next time I’m in HK or Japan I’ll make sure I tell the whites I see that they should start picking pleas fleas off themselves more often.

  28. […] I mentioned a few days ago on my blog, using current market exchange rates, Australia now has a higher income per person than the US. Matthew Turner observed the UK passing the US a few months ago and estimated several years ago […]

  29. Can anyone direct me to a site that would give comparisons of many elements in the ‘quality of life’, understood to be such as chronic diseases,incidence of depression, life expectancy, etc, etc.??

    Grateful for a reply or a search trail (I’ve tries WHO but they are too complicated)
    Thanks

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