International comparisons of GDP and working with economic data Flashcards
Describe the two problems when comparing GDP across countries and the solutions to the problems
Two problems:
- Countries differ in size
- Countries differ in their price level (and currencies)
Solutions:
The first problem: GDP per capita
The second problem: GDP adjusted by PPP
How do we mitigate the problem of comparing quantities within the same country across years (how to account for changes in prices across years?)
Across years, use GDP deflator: temporal price index with value 100 in base year (e.g. 2010 = 100)
How do we compare quantities across countries within the same year (how to account for differences in price levels across countries?)
Across countries, use Purchasing Power Parities (PPP): spatial price index with value 100 in base country (e.g. USA = 100)
Compare PPP and the exchange rate
PPP is the conversion rate of currencies that equalizes purchasing power between countries
Why not deflate with the market exchange rate?
• PPP is calculated based on a selected basket of goods and services
• Exchange rate is determined by demand and supply on currency market -> mainly influenced by imports and exports and capital movements
• Exchange rate fluctuates MUCH more
Note: Even if in countries with same currency, price levels might differ
Implication: even if currencies are the same, still need PPPs
Why are PPP’s smaller than exchange rates in especially poor countries?
PPPs are often smaller than exchange rates in poor countries (e.g. Vietnam and Russia) -> deflating by exchange rates underestimates GDP
Reason:
• PPP covers also services + non-tradable goods, many of which are cheaper in poor countries
• “A haircut in Aarhus is more expensive than in Hanoi”
• Labour is cheaper in poor countries and services are labour-intensive
When poor countries become richer, labour becomes more expensive, price levels rise and exchange rates can be expected to fall -> PPP and exchange rates converge
Calculation of PPPs is complex and can vary substantially over time
Describe base material, comparative material and explanatory material
Base material:
• Data and information that directly illustrates the issue Example: The evolution of wages in Denmark over time → data on wages for a specific time period
Comparative material:
• Data and information that is used as a standard or scale against which the base material is compared Example: The evolution of wages in Denmark over time → data on CPI or other price indices for the same time period
Explanatory material: why?
• Data and information used to deepen the analysis by explaining the course of development, movement or changes demonstrated by base and comparative material
Explain how to standardize i.e. how to evaluate the explanatory power of each factor when there are multiple factors
To evaluate the explanatory power of each factor, vary one factor while holding the other fixed
Explain how to calculate the percentage change or growth rate in Y between 0 and t
g = Y(t)/Y(0) -1
Explain how to calculate average growth rate in Y between 0 and t
(if t measures years -> average annual growth rate)
You take the t’th root of Y(t)/Y(0) and minus 1 last
Explain the difference between a percentage change and a percentage points change
Percentage change: a relative difference
Percentage points change: an absolute difference
What does the Lorenz curve illustrates and what are the two extremes?
What is on the horizontal and the vertical axis?
The Lorenz curve illustrates inequality in distribution. There are two extreme: total equality and total inequality.
The graph plots percentiles of the population on the horizontal axis according to income or wealth. It plots cumulative income or wealth on the vertical axis, so that an x-value of 45 and a y-value of 14.2 would mean that the bottom 45% of the population controls 14.2% of the total income or wealth.
What is the relationship between the Gini coefficient and the Lorenz curve?
The Gini coefficient is equal to the area below the line of perfect equality (0.5 by definition) minus the area below the Lorenz curve, divided by the area below the line of perfect equality. In other words, it is double the area between the Lorenz curve and the line of perfect equality.
Another way of thinking about the Gini coefficient is as a measure of deviation from perfect equality. The further a Lorenz curve deviates from the perfectly equal straight line (which represents a Gini coefficient of 0), the higher the Gini coefficient and the less equal the society
