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February 11, 1990
"A Currency Affair - U.S. Economy is Tops by Certain Measures"
San Jose Mercury News
By Timothy Taylor
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EVERY political speech contains a share of tasty statistical tidbits served up without benefit of context.

For example, someone unearthed this morsel for President Bush's State of the Union speech: "The American worker is the most productive worker in the world."

In his response on behalf the Democratic party, Speaker of the House Thomas S. Foley of Washington replied, "As Democrats, we're not satisfied with a trend that has seen this nation drop from first to sixth in the standard of living." These statements seem to contradict each other. The nation with the most productive workers in the world should also have the highest standard of living, because the standard of living relies on productivity.

But strangely enough, both Bush and Foley can cite numbers to support their position. Comparing countries involves translating one currency to another, which can create all kinds of statistical confusion.

The quick and dirty way to find the standard of living in a country is to divide the size of the economy by the population, which is measured as per capita gross domestic product (GDP). But the economies of different countries have a nasty habit of being measured in the currency of each country: the U.S. economy in dollars, the Japanese economy in yen, the German economy in marks, and so on.

The most obvious way to translate GDP from different countries into a common currency, so that per capita GDP can be compared, is to use the market exchange rate. For example, the yen is now trading at about 144 to a dollar on foreign exchange markets and the Japanese GDP is now about 400,000 billion yen. Dividing the GDP as measured in yen by 144 yen per dollar means that Japan's GDP is about $2.77 trillion.

Simple enough, except that exchange rates have been riding a roller coaster through the 1980s. In 1984, yen traded at 234 to the dollar. If the exchange rate had stayed at that level, the current Japanese GDP would work out to $1.71 trillion. By 1988, on the other hand, a dollar bought only 128 yen. If the exchange rate was at that level, the current Japanese GDP would be $3.12 trillion.

Using the market exchange rate to compare two economies gives some very unreliable answers, because the changes you observe depend on whether the dollar is flying high or low on world currency markets, not actual changes in citizens' standard of living.

Yet the statement by Foley that the U.S. standard of living is sixth in the world uses exactly that method of comparing different countries. As the first column of the nearby table shows, comparing per capita GNP at current exchange rates means that Switzerland, Norway, Denmark, Japan and Sweden are ahead of the United States in standard of living.

The second column of the table compares economies using an alternative exchange rate calculated by economists according to "purchasing power parity." Think of it this way: Spend $100,000 in the United States on internationally traded goods like steel, oil, televisions, cars, wheat, machine tools and so on. The purchasing power parity exchange rate is calculated so that if you take that $100,000, go to Japan, and turn the dollars into yen at the PPP exchange rate, you will be able to afford the same combination of goods.

Instead of using the rate at which one currency can be traded for another, the purchasing power parity rate tries to measure the actual purchasing power of dollars or yen or marks in their home countries. Of course, the details of PPP calculations are controversial and the figures should not be taken as precise or exact. But since prices of actual goods have jumped around much less than market exchange rates during the 1980s, purchasing power parity provides a more stable and meaningful way of comparing economies.

Despite the tone of pessimism and panic one often hears about the U.S. economy, the second column of the table confirms President Bush's claim that the U.S. economy has the highest productivity and standard of living in the world, if purchasing power parity exchange rates are used to compare economies. Only Canada is close. Japan's per capita GDP is only 72 percent of the U.S. level. But although the U.S. economy is the richest in the world, its lead is eroding. If Japan can sustain an economic growth rate that is 2 percent higher than the U.S. for the next 13 years, it would catch the United States. Since 1983, the Japanese economy has been growing only about 0.25 percent per year faster than the U.S. economy. But from 1970-82 the Japanese economy grew by about 2 percent faster per year, and in the 1960s Japan grew an average of 8 percent faster per year!

With current trends, the United States has at least a decade left before its economy is overtaken by Japan or any other major competitor. That's enough time for long-term investments in economic growth to pay off.

But while Bush's State of the Union speech recognized that the U.S. economy was still ahead, his budget doesn't slash deficits and push investment in education, research and development, infrastructure, and new industrial plant and equipment with the fervor needed to keep America ahead.

Comparing gross domestic products depends on how economic output is translated into a common currency. If converted at current exchange rates, the U.S. ranks sixth. If measured by purchasing power parity, the U.S. ranks No. 1.

Country Current exchange Purchsng parity
U.S. $18,338 $18,338
Canada $16,019 $17,216
Denmark $19,730 $13,241
France $15,818 $12,803
Germany $18,280 $13,323
Italy $13,224 $12,254
Japan $19,437 $13,181
Norway $19,756 $15,405
Sweden $18,876 $13,771
Switzerland $25,848 $15,838
U. Kingdom $11,765 $12,340

Source: OECD in Figures, 1989 edition

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