If you’re from a high-income country or a high-income city and you travel somewhere else, you’re probably well aware that many items are, at least sometimes, significantly cheaper in low-income countries. Food and dining, entertainment and even health care. As a result, $100 of purchasing power in the U.S. economy appears to buy more goods and services in many parts of the world.
The World Bank’s International Comparison Program attempts to coordinate prices around the world. In other words, how much does it cost, as economists say, to buy the same “basket of goods” from different countries? The result of this adjustment is to calculate the difference between the “market rate” and the “purchasing power parity, or PPP, rate. The market rate tells you how much of a currency you will receive in exchange for another currency. The PPP rate is the amount you can actually buy with that currency. Performing these “purchasing power parity” comparisons, adjusted for goods and services, is a huge task, so ICP only updates PPP figures every few years. Comparison for 2021 is now possible.
When comparing the size of national or regional economies, the standard result is that the economies of high-income countries appear relatively smaller when measured in PPP terms than when measured at market exchange rates. Because prices tend to be lower in low-income countries. for example, Third panel of this figure Measured at market exchange rates, high-income countries account for 62% of global GDP, but at PPP rates they account for 46% of global GDP.
Comparing the size of economies using PPP exchange rates means that China is already the largest economy in the world. ICP report note:
The world’s largest economy in 2021 is China, with GDP based on PPP of $28.8 trillion, accounting for 18.9% of global GDP. The United States was the second largest country, accounting for nearly $23.6 trillion, or 15.5% of global GDP. India’s economy was the third largest, accounting for 7.2%, at $11 trillion. Additionally, the ten largest economies include the Russian Federation (USD 5.7 trillion, 3.8%), Japan (USD 5.6 trillion, 3.7%), Germany (USD 5.2 trillion, 3.4%), and Brazil (USD 3.7 trillion). , 2.4%), and France (USD 3.6 trillion). 2.4%), the UK (USD 3.5 trillion, 2.3%), and Indonesia (USD 3.5 trillion, 2.3%).
Here is a snapshot of the global economy through a PPP lens. The vertical axis represents each country’s share of the world’s population (i.e. China and India are the largest), and the horizontal axis represents GDP per capita measured using the PPP exchange rate. If the Go to the linkYou can click on each individual bar to see which country it represents.
To identify differences in price levels across countries and to determine the magnitude of adjustments due to PPP exchange rates, the ICP sets the average of the global price levels across countries to 100. The criteria are as follows:
If the index exceeds 100, it means prices are high compared to the world average, and PLI is [Price Level Index] Anything below 100 means the price is low. The most expensive economy in the world is Bermuda, with a GDP PLI of 194, followed by the Cayman Islands, Switzerland, Israel, Iceland and Australia. The United States ranked 9th in the world with a GDP PLI of 158. The GDP PLI for high-income countries was 136. The GDP PLI for upper-middle-income countries was 81. For lower-middle-income countries… the average GDP PLI for low-income countries was 50.
It may occur to the reader that it would be an enormous task to measure price levels in a similar way in all countries of the world, adjusting for differences in quality and availability of various goods and services. There is a reason why the estimated 2021 PPP exchange rates are published in 2024. It takes time to put all this together. Although the report explains the methodology in some detail, there is room for skepticism. Actually, back in In 2010, Angus Deaton delivered a presidential address to the American Economic Association. (Available for free online here) details the “weak theoretical and empirical foundations” of such measures. But to anyone who has read this far, it will come as no surprise that imperfect economic statistics can still be useful when carefully applied to context.
