Using detailed lists of closely comparable products, national statistical offices submitted the prices of thousands of items to regional coordinators. These were aggregated up to 129 basic headings, for each of which the estimated value of the expenditure was also submitted. The regional results were brought together in a Global Office housed at the World Bank, under the supervision of a Global Executive Board chaired by Dennis Trewin, the former Australian Statistician. The operation was supported by a Technical Advisory Group of eminent experts from academia and from national and international statistical offices.
In his article in ALR, Sheridan said that PPP was ‘basically a con’. He claimed that it ‘rests on the proposition that a man in Peru gets fed, so does a man in France: therefore a bowl of rice in Lima should be given the same economic value as a meal of lobster and filet mignon in Paris.’
This too is wrong. The ICP’s product lists covered over 100 items of food, which were priced in each locality using well-documented procedures for determining the sample of outlets for individual products. If the Program’s experts had been so foolish as to equate the Peruvian’s rice with the Parisian’s filet mignon, their estimates of the real cost of ‘getting fed’ would have been similar in both places. In fact, they found that real expenditure on food per head was over two-and-a-half times greater in France than in Peru.
Sheridan also asserted that ‘Rudd was presumably referring to some version of the famous Goldman Sachs BRICs study’, and claimed that that study’s forecast that China could become the world’s biggest economy by the late 2020s was ‘only possible if you measure by purchasing power parity rather than real dollars.’
This is wrong yet again. The Goldman Sachs study used exchange rate converters, not PPPs. There is no reason to doubt that the Prime Minister’s reference to ‘some estimates’ referred to those made by leading authorities, not to the flawed forecasts of an investment banking firm. Sheridan’s criticism of unnamed ‘China boosters’ for according the BRICs study ‘a place of central scriptural authority’ is misdirected, because Sheridan himself gives unwarranted credence to the Goldman Sachs numbers (as quoted in a book by former Economist editor Bill Emmett).
Finally, Sheridan predicted that ‘The US is likely to remain the world’s only super-power through to mid-century.’
It is impossible to know in 2008 whether or not such a forecast will be realised, but it is not reassuring that its author accepts the official statisticians’ concept of GDP but rejects the statisticians’ advice about how the estimates for different countries should be compared. This important issue is discussed in detail in Ian Castles and David Henderson, International Comparisons of GDP: Issues of theory and practice, (in World Economics, Jan.-Mar. 2005: 59-85) and in the sources cited therein.
Those who wish to use relative GDPs as a measures of a country’s potential to achieve super-power status have a responsibility to inform themselves of the way in which national GDP estimates are prepared, what they purport to measure and how they should be used to make cross-country comparisons.
Far from being ‘basically a con’, PPP-based estimates are the only valid basis for cross-country comparisons of GDP. If they are judged to be deficient, GDP comparisons should not be made at all. As Jacob Ryten, former head of economic statistics at Statistics Canada and consultant to the UN Statistical Commission on the ICP, has correctly observed, ‘The only viable alternative to the use of inadequate PPP-based estimates is better PPP-based estimates’ (quoted in Castles and Henderson, op. cit: 69).
Ian Castles is a Visiting Fellow, Crawford School of Economics and Government, ANU, and former Australian Statistician (1986-94).