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Picture Jamaica where in the period 2007 - 2010.. it's affected by a worldwide downturn (not of the Govt's making obviously) and virtually EVERY category of production declines.. tens of thousands of jobs are lost...and poverty soars....
Then consider the indices used to measure the Jamaican economy... ALL of which are adjusted for price movements...including the price of money..inflation/exchange rates of course...but where different methods of price adjustment are applied
Gross Domestic Product/ Gross National Income--- FLAT/DECLINING-- and IMF/World Bank forecast more declines
Gross National Income on Purchasing Power Parity basis... FLAT/DECLINING
Both indices jiving with reality of recession
Then there is the GNI adjusted by the so-called Atlas Method of the World Bank--- Rising by 20% -- Economists find this method useful sometimes in comparing different economies
The Atlas Method is a particular statistical technique of smoothing exchange rate shifts over a time period...different methodology from the techniques used in GDP or PPP....the closest parallel in the real world is when a "curve" is applied to test scores to adjust for poor scoring.... so when a guy gets a nominal score of 50%...the curve can take him to 65%... what's that guy's "real" score??.. 50% or 65%?? Pick yuh chice
If Jamaica's average income in real terms was growing at a rate of 20% over 3 years (approx 6.5%/year)...then the size of the economy would DOUBLE IN ABOUT 12 YEARS... so clearly this is very far from reality
People have a choice about what index to use in particular circumstances.... a curved index giving skewed results...or another that corresponds with reality....but as I said before
It is statistically impossible for there to be a (real) 20% increase in average income in the face of a 3 year recession, declining incomes, soaring unemployment & poverty
Unless statisticians throw a curve ball and the naive try colt di game
Mout an Statistics mek fi seh anyting...
For more info on comparative econ indices
Extract:
Question: What are the drawbacks to using exchange rates to convert GDP to a common currency for international comparison purposes?
Answer: There are two major disadvantages. First, exchange rates vary from day to day and sometimes change abruptly - perhaps because of speculation against a currency or because of changes in interest rates. If GDP is converted into US dollars using exchange rates, the size of a country's economy will also appear to vary from day to day and undergo abrupt shifts for reasons that have nothing to do with the actual levels of economic activity in that country. This volatility can be overcome to some extent by using averaging devices, such as the Atlas method employed by the World Bank, although the results can be distorted if exchange rates change rapidly. A second disadvantage is that exchange rates do not simply reflect the relative prices of goods and services produced in a country – they are affected by the relative prices of tradable goods and by factors such as interest rates, financial flows etc. So the use of exchange rates to convert a service such as a haircut may give inappropriate answers and the PPP approach is to be preferred conceptually. When the GDP of different countries is converted to dollars using PPPs, they are all being valued at a common set of prices. As with a time series of GDP at constant prices, it then becomes possible to compare the underlying volumes.
Question: Are PPPs a substitute for exchange rates in making international comparisons?
Answer: It would be a mistake to think of PPPs as a substitute for exchange rates in making international comparisons. In fact, they are complementary because PPP based comparisons are useful in specific situations, such as that described above, while exchange rate based comparisons are more appropriate in others. For example, if an analyst wanted to work out how much could be imported with the proceeds from a particular level of exports then it would be necessary to use exchange rates rather than PPPs.
Question: What does it mean if a PPP differs from the corresponding exchange rate?
Answer: The simple example above of the price of a litter of Coca Cola in France and the USA can show the implication of any such divergence. For example, if the PPP for GDP turned out to be 7.50 francs to the dollar and the actual exchange rate was 6.00 francs to the dollar, an American changing dollars for francs at this exchange rate would find the level of prices in France higher than at home.
Then consider the indices used to measure the Jamaican economy... ALL of which are adjusted for price movements...including the price of money..inflation/exchange rates of course...but where different methods of price adjustment are applied
Gross Domestic Product/ Gross National Income--- FLAT/DECLINING-- and IMF/World Bank forecast more declines
Gross National Income on Purchasing Power Parity basis... FLAT/DECLINING
Both indices jiving with reality of recession
Then there is the GNI adjusted by the so-called Atlas Method of the World Bank--- Rising by 20% -- Economists find this method useful sometimes in comparing different economies
The Atlas Method is a particular statistical technique of smoothing exchange rate shifts over a time period...different methodology from the techniques used in GDP or PPP....the closest parallel in the real world is when a "curve" is applied to test scores to adjust for poor scoring.... so when a guy gets a nominal score of 50%...the curve can take him to 65%... what's that guy's "real" score??.. 50% or 65%?? Pick yuh chice
If Jamaica's average income in real terms was growing at a rate of 20% over 3 years (approx 6.5%/year)...then the size of the economy would DOUBLE IN ABOUT 12 YEARS... so clearly this is very far from reality
People have a choice about what index to use in particular circumstances.... a curved index giving skewed results...or another that corresponds with reality....but as I said before
It is statistically impossible for there to be a (real) 20% increase in average income in the face of a 3 year recession, declining incomes, soaring unemployment & poverty
Unless statisticians throw a curve ball and the naive try colt di game
Mout an Statistics mek fi seh anyting...
For more info on comparative econ indices
Extract:
Question: What are the drawbacks to using exchange rates to convert GDP to a common currency for international comparison purposes?
Answer: There are two major disadvantages. First, exchange rates vary from day to day and sometimes change abruptly - perhaps because of speculation against a currency or because of changes in interest rates. If GDP is converted into US dollars using exchange rates, the size of a country's economy will also appear to vary from day to day and undergo abrupt shifts for reasons that have nothing to do with the actual levels of economic activity in that country. This volatility can be overcome to some extent by using averaging devices, such as the Atlas method employed by the World Bank, although the results can be distorted if exchange rates change rapidly. A second disadvantage is that exchange rates do not simply reflect the relative prices of goods and services produced in a country – they are affected by the relative prices of tradable goods and by factors such as interest rates, financial flows etc. So the use of exchange rates to convert a service such as a haircut may give inappropriate answers and the PPP approach is to be preferred conceptually. When the GDP of different countries is converted to dollars using PPPs, they are all being valued at a common set of prices. As with a time series of GDP at constant prices, it then becomes possible to compare the underlying volumes.
Question: Are PPPs a substitute for exchange rates in making international comparisons?
Answer: It would be a mistake to think of PPPs as a substitute for exchange rates in making international comparisons. In fact, they are complementary because PPP based comparisons are useful in specific situations, such as that described above, while exchange rate based comparisons are more appropriate in others. For example, if an analyst wanted to work out how much could be imported with the proceeds from a particular level of exports then it would be necessary to use exchange rates rather than PPPs.
Question: What does it mean if a PPP differs from the corresponding exchange rate?
Answer: The simple example above of the price of a litter of Coca Cola in France and the USA can show the implication of any such divergence. For example, if the PPP for GDP turned out to be 7.50 francs to the dollar and the actual exchange rate was 6.00 francs to the dollar, an American changing dollars for francs at this exchange rate would find the level of prices in France higher than at home.
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