Angus Deaton admirably captures the complex subject of purchasing power exchange rates, and the importance of the new calculations for 2017 (“Why the world’s richest countries are not all rich”, Opinion, 6 October).
But purchasing power parity estimates should be used with much more caution than they are, for at least two reasons. First, Professor Deaton says that “comparable international accounts are needed for essential measures, including cross-country comparisons of gross domestic product, living standards, and global measures of poverty and inequality.” Yes, PPP exchange rates are relevant for comparing living standards and poverty between countries. But to understand the distribution of power in the interstate system – a question that interests political scientists and sociologists more than economists – we need to compare incomes to market exchange rates, which allows us to measure the relative capacity of residents to ” a country to buy goods and services from another country (renting offices in Washington DC, hiring lawyers to handle commercial disputes, for example).
Second, PPP estimates are vulnerable to manipulation, unlike market exchange rate comparisons. The elaborate price surveys aim to select items that balance the trade-off between internationally comparable items (eg a Brooks Brothers shirt) and items representative of what most people actually buy (a workman’s shirt).
Governments that wish to make their country appear richer or poorer can informally ask investigators to tip the scales one way or the other. Anyone who thinks governments have no interest in doing so has ignored it.
The bottom line: We need to treat PPP income estimates with a lot of caution, and we need to recognize that they are potentially more useful for comparing standards of living than for comparing relative power.
Robert h wade
Professor of Global Political Economy,
London School of Economics,
London WC2, United Kingdom