Some Terminology Notes for Cross-Sectional Comparisons of GDP

In class I recommended that Wikipedia is a good source for information on GDP across countries.

I agree with that, but I do want to give you some pointers.

First off, start with this Wikipedia page. It’s actually a list of lists: kind of a table of contents. There are a number of different ways to rank countries.

Secondly, the word “nominal” is one of those that is used to mean different things in different contexts. It does not just mean “in terms of some paper currency” as I use it in class. Instead, it’s more along the lines of “initial” or “untreated” or “unadjusted”.

This brings up a problem with these lists in Wikipedia. These are a great way to make cross-sectional comparisons. But a problem with making cross-sectional comparisons across countries is that it requires us to adjust for differences in exchange rates and purchasing power (PPP).

This is where Wikipedia creates a problem for student. On this page, when they use nominal what they mean is adjusted by exchange rates rather than by PPP. They do not mean that the link goes to a list of countries GDP which has not been adjusted for inflation. Every link on this page goes to a list of countries ranked by real GDP. Using nominal here is a big problem because it steers users towards the tables using PPP.

Third, always keep in mind that ranking by PPP tends to make poorer countries look richer than they are, and richer countries poorer than they are. Using exchange rates has the opposite effect. As always, these are indexes, so there is no right answer. Be aware of both.

Fourth, keep politics in mind. Some countries GDP measurements are better than others. Also, for international agencies, decisions are often made by votes where each country gets a single vote. If the issue is bragging rights about who is bigger, poorer countries will often vote in a way that makes them look larger than they are. However, if the issue is about how much aid to transfer from rich to poor, the poor countries will often vote in a way that makes them look smaller.

Fifth, growth rates should always be higher for poorer countries. If it isn’t, they won’t catch up to the richer countries. We have a lot of evidence that many poorer countries do catch up (but not all of them). Generally, rich countries never grow really fast. But, it does happen that poor countries do sometimes grow slowly: this is a huge failure and should always draw your attention.

Sixth, consider the sources. I think the IMF and World Bank publish reputable data. I am less sure about the UN: it is more of a political rather than an economic institution, so I worry a little about their economic data. The CIA keeps track of economic data for security reasons, but has a history of overstating the size of the economy’s of America’s “enemies”. The Conference Board is a private think tank in New York with an excellent reputation. Eurostat is the official statistical agency of the European Union: the quality of their data is usually excellent, but there is some political influence there that economists worry about.

Lastly, this is a list of ranked lists. There are a lot of choices. If a journalist or politician wants to push a particular point, they can cherry-pick the ranking that makes their position look the strongest. It’s the economists job to look past that and dig deeper.