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

26/11/2015 Statistics Canada Statistique Canada 2 Purchasing Power or Producing Power Parities? John Baldwin and Ryan Macdonald (forthcoming)

26/11/2015 Statistics Canada Statistique Canada 3 Main result  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

26/11/2015 Statistics Canada Statistique Canada 4 Projection Methods Vs Base Years

26/11/2015 Statistics Canada Statistique Canada 5 Purchasing Vs Producing Power Parities  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

26/11/2015 Statistics Canada Statistique Canada 6 GDP PPP Decomposed into FDE and Trading Gain Contributions

26/11/2015 Statistics Canada Statistique Canada 7 Purchasing Vs Producing Power Parities  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

26/11/2015 Statistics Canada Statistique Canada 8 Result not unique to Canada

26/11/2015 Statistics Canada Statistique Canada 9 Conclusions  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