Premature Schadenfreude Averted

I imagine the German media will soon pick up this Times Article claiming that the UK’s living standard has exceeded that of U.S.  Perhaps The Scanner’s helpful pre-debunking (prebunking?) is in order:

The supposed shift in "living standards" is actually an artifact of the dollar’s depreciation. The article admits this, which just makes it even stupider.

[T]he right way to do this sort of thing is to strip out the effect of exchange rates by converting pounds to dollars using purchasing power parity (PPP). Wikipedia has a nice chart which shows that, according to IMF data, in 2006 the UK’s GDP per capita was about 22% lower than ours and that number hasn’t changed much since then.

By most of these measurements, by the way, Germany’s slightly poorer than Great Britain.  The United Nations Human Development Index is an alternative way to measure national well-being that’s broader than GDP-based indices.  The US (#12) also beats the UK (#16) there, and both countries beat Germany (#22).  However, the HDI differences between these nations are miniscule, and everyone loses to Scandinavia and France.

9 thoughts on “Premature Schadenfreude Averted

  1. When using PPP, you should not forget, that they are a construct of fiction, used by economists such a myself to equal out differences in Purchasing Power. What this cannot show is that there is no comparability whatsoever for so called non-tradeables such as a hair cut, which is much cheaper in uganda than in germany. Equally, this construct suggests, that all goods are perfect substitutes for each other, which they most surely are not. When arguing in PPP, you should not forget these problems when comparing these countries. Also, PPP are not able to show any kind of structural problems within the countries, so they are not very well in comparing countries, when they are standing alone. They should always be backed up with other material.
    Concerning the HDI, which is one of the most used indeces for measuring poverty, it has to be said, that the measures taken are purely arbitrary and therefore very hard to take seriously. But is easily compared, so everyone uses it.

    What should not be forgotten is that both measures are used by people who live for that kind of stuff and should not used without knowing the above. Or as is always said in any kind of shows, to do so is at your own risk…

  2. You don’t have to be a genius to know that Germany is on the whole poorer than the US and the UK. For that, it is sufficient to compare the prices for parking your car for one hour in a parking lot in the most expensive zone of the most prosperous city of the respective countries. High prices reflect high purchasing power. Still, comparisons like the ones you cite have – questionable though they are – become very trendy among politicians and economists. As regards “living standards”, there are so many factors determining them (what you earn being an important one, but certainly not the only decisive one) and even within countries there are enormous differences.

  3. Thanks for the comments. I completely agree with both of you and found Maximilian’s comments enlightening. Let it be said that I am not making any normative judgments here.

    I have noticed a trend in the German popular press to jump upon news stories that show (or seem to show) America in decline. Some German journalists seem uncomfortable with the fact that Germany, though one of the world’s richest and most developed countries, is not as rich as the United States. I’ve even heard a couple people say that the U.S. doesn’t “deserve” to be as rich as it is, whatever that might mean.

    My opinion is that these indicators are useful as broad measures of relative wealth, but don’t tell us very much else. Your mileage may vary, and I find my quality of life higher in Germany than it was anywhere I lived in the U.S., even though I make less money here. It’s all about vibrant neighborhoods, bicycling to work, having plenty of vacation and interesting things to do during it, and living in a city in which nice parks and forests are a 15-minute bike ride away.

  4. Thank you for your praise… It was not as difficult as it may seems, I am writing my diploma-thesis on migration in europe and copied that part from my work and translated it as good as I possibly could…

  5. @Maximilian:
    Your comment is intriguing; unfortunately I am but marginally familiar with your arguments. Therefore I would like to ask a couple of questions:

    – as to “nontradeable goods”: If I remember correctly, this is about the effect that a man-hour of an industry worker in Lima is much more productive than in Mali, due to different availability of productive capital and technological/organizational knowledge, while the man-hour of a barber need not be more productive. Computing PPP means to reduce the barber’s productivity in Mali by the same factor as that of the average worker. I still do not quite understand why this is a problem after taking averages; however, the consequence seems to be only poor countries are
    mapped even a bit poorer than they really are. So I guess there is not much bias while comparing developped countries, at least if they have a similar ratio of GDP out of the three sectors?

    – as to structural problems within: I simply do not get it.
    What do you mean by “comparing countries, when they are standing alone”?
    When comparing, you might need more than one? 😉

    ==================================

    Btw, the HDI list/map on wiki is the first time I had a look at a comprehensive development classification for more than a decade; thanks,
    Andrew, for posting the link.
    I understand that a lot has happened in the meantime;
    however, not so many changes have effected the coarse classification into “developped, threshhold, developping”.
    Frequently I hear that Africa has by far subproportionally benefitted from the global surge in investments, and this is certainly true. However, the most striking transitions in development trichotomy are several countries in Africa having managed to get from “developping” to “threshold”, and in South America almost all countries have either took the step “developping” -> “threshold” or “threshold” -> “developped”.

    I found that very interesting and nice to learn. Provided that the two maps which I have in mind are in some way compatible.

  6. @R.J: Let me answer your second question first, it is much simpler than the other one. The standing alone part refers to the construct PPP, not to countries. A comparism solely based on this one figure is not very good because it simply has to backed up with other figures to avoid misinterpretation.

    The other one ist not so simple. Non Tradables are mainly Services. It is simply not possible to compare a haircut in China with one in Germany, because of the different prices and the different work both barbers do. For example, in China you might get simply a cut, while in Germany there is washing, drying and styling included.
    I don´t get your comparism, but if I understand you correctly, which I´m absolutly not sure of, you say the right thing. PPP compares the Money people get with the price they have to pay for a specific combination of products (German: Warenkorb), but it is not possible to say if this combination is exactly the same because of the differences in design or production. For example, German bread cannot be compared to bread in USA because of the difference in production and the availability of German “Sauerteig” (bread dough), in the USA.
    Secondly, the combination of products is again totally arbitrary, which makes comparism possible, but not impartial. (As much the same problem with HDI).

    I hope this clarifies what I meant before. Simply said, it is like this old quote about statistics Churchill made.

  7. Hmm, the old quote from Churchill (“Ich glaube nur der Statistik, die ich selbst gefälscht habe”) you touched is very likely a hoax, invented by the Reich Ministry for Popular Enlightenment and Propaganda during the war… See Werner Barke’s insightfull article dealing with its alleged origin.

  8. @Maximilian Gruber:

    When using PPP, you should not forget, that they are a construct of fiction, used by economists such a myself to equal out differences in Purchasing Power.

    A fact that, by the way, is well illustrated by the recent drastic re-evaluation of the estimated sizes of some economies (overblown commentary here).

    @Onkel Heini:

    Hmm, the old quote from Churchill (“Ich glaube nur der Statistik, die ich selbst gefälscht habe”) you touched is very likely a hoax, invented by the Reich Ministry for Popular Enlightenment and Propaganda during the war… See Werner Barke’s insightfull article dealing with its alleged origin.

    The article makes no claim whatsoever as to the actual origin of the quote. While it suggests that the ascription of this saying to Churchill would suit the portrayal of Churchill in the German press during the war, the author completely failed in his attempts to find the origin of the quote.

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