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Enhancing Economic Analysis: Methodology for Projecting Benchmark Results

This study compares Purchasing Power Parities (PPP) measured with real Gross Domestic Income versus Gross Domestic Product. It suggests using expenditure relative PPP for trade balance and GDI deflators for accurate comparisons. The influence of trading gains on PPP in various countries is discussed.

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Enhancing Economic Analysis: Methodology for Projecting Benchmark Results

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  1. PPPs A Note on Projecting Benchmark Result Art Ridgeway Based on a paper by John Baldwin and Ryan Macdonald

  2. Purchasing Power or Producing Power Parities? John Baldwin and Ryan Macdonald (forthcoming) Statistics Canada • Statistique Canada

  3. PPP programs as they are currently measured accord (imperfectly) with a real Gross Domestic Income concept, not a real Gross Domestic Product The comparison can be moved to a correct GDI concept with a small change – using expenditure relative PPP rather than exchange rate for the net trade balance Inter-temporal extrapolations using GDP deflators are inappropriate – GDI deflators should be used Statistical systems are not currently structured to facilitate a GDP based comparison Increases in export and import data collection are needed for a GDP based comparison Main result Statistics Canada • Statistique Canada

  4. Projection Methods Vs Base Years Statistics Canada • Statistique Canada

  5. The GDP PPP can be decomposed into two pieces a contribution from domestic prices that corresponds to the GDI based reference year a contribution from the trading gain that comes from the terms of trade Since 2000 the trading gain has often been the dominant factor Purchasing Vs Producing Power Parities Statistics Canada • Statistique Canada

  6. GDP PPP Decomposed into FDE and Trading Gain Contributions Statistics Canada • Statistique Canada

  7. The influence of the trading gain is not unique to Canada The next chart uses OECD data to compare bilateral PPP index changes between the US and Australia, Canada, New Zealand, Norway, Japan and Korea In resource exporting countries the GDP and GDI based PPPs present conflicting outcomes In resource importing countries the trading gain reinforces domestic price movements Purchasing Vs Producing Power Parities Statistics Canada • Statistique Canada

  8. Result not unique to Canada Statistics Canada • Statistique Canada

  9. Current statistical systems facilitate a purchasing power parity based on GDI Producing power parities projections in Canada will in future be based on GDI rather than GDP Further work is needed on producing power parity estimates and those that have been calculated are viewed as relatively inaccurate should be used with caution Conclusions Statistics Canada • Statistique Canada

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