Comparing Economies

How to value the size of an economy, or the wealth of its citizens? Mike

Mandel has an interesting

blog entry today saying that GDP might not be a particularly useful measure

any more – and he’s not talking about some fuzzy notion like Joe

Stiglitz’s "green

net national product," either. Instead, he cites Stanford’s Bob

Hall, who says that real income growth, not GDP growth, should be the

main macroeconomic indicator that people look to as a guide to how well the

economy is doing.

Even if you switch from GDP to real income, however, you still have the tricky

question of how to compare the sizes of two different economies with two different

currencies. In China, there’s a world of difference involved if you use purchasing

power parity (PPP) as your guide on the one hand, or if you use international

exchange rates on the other. But it’s not just China. John Quiggin

points out that the difference

is pretty big in Holland, too: PPP, according to Penn,

is just 96 US cents to one Dutch euro, while the exchange rate is closer to


Using the Penn numbers, income per person in the Netherlands is about 75

per cent of that in the US, and this number is often quoted on the assumption

that purchasing-power parity means exactly what it says. But using exchange

rates, as would have been standard a couple of decades ago, income per person

is a little higher in the Netherlands than in the US.

Quiggin reckons it’s hard either way, but that one way of telling whether a

country is really worse off than the US is to look at immigration flows

in both directions. Since the number of French people moving to America and

the number of Americans moving to France is both pretty small, he says, the

chances are that there’s really not all that much of a difference in living


Brad DeLong, however, reckons that Quiggin is using the wrong

basis of comparison. A small, dense country like Holland can’t be usefully compared

to a large, empty

country like the USA. Really, we should look

to small, dense parts of the US instead.

Perhaps the right comparison to make is not the binary Holland-U.S. comparison,

but the trinary Holland-parts of the U.S. that feel most like Holland-rest

of U.S. comparison. The largest such region in the United States is, of course,

New Amsterdam, but the inner urban cores of Boston,San Francisco, Chicago,

and Philadelphia are also a much closer approximation to Holland than the

rest of the U.S. is. What would a comparison of real exchange rates and real

income levels across those two show? And what does a comparison of real exchange

rates and income levels comparing New Amsterdam and the rest of the United

States show?

I haven’t spent much time in Holland, but it’s an interesting question. My

gut feeling is that Brad’s right, and that New Amsterdam (a/k/a New York) is

indeed more similar to Old Amsterdam than it is to Amsterdam,

Missouri (median household income: $29,821) or Amsterdam,

Ohio (median household income: $24,583). In New York City the median household

income is $38,293. Anybody got any numbers for Amsterdam?

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