Paul Krugman: I keep seeing a factoid to the effect that the euro area and the US economies were the same size in 2008, but America is now 44 percent bigger. Folks, that’s just the exchange rate. At purchasing power parity, nothing like that has happened

I keep seeing a factoid to the effect that the euro area and the US economies were the same size in 2008, but America is now 44 percent bigger. Folks, that’s just the exchange rate. At purchasing power parity, nothing like that has happened

Tell Fareed Zakaria, he just published an op ed with that factoid

Thank you. This already sounded fishy to me, I'm glad to have your confirmation.

Isn't that just a way of saying that the dollar is overvalued?

No more than it was undervalued in the past when the Euro area economy looked much larger. Exchange rates vary. That’s why comparing different economies by translating currencies through rates of exchange does not give a very accurate picture

Doesn't it give the best possible picture for comparing economies globally? Like, "how much grain (or solar panels, or gold, or oil) per capita can this economy procure?" How is this not exactly a measurement that's important?

No purchasing power parity is the best way to compare economies. www.investopedia.com/updates/purc...

What Is Purchasing Power Parity (PPP), and How Is It Calculated?www.investopedia.com Purchasing power parity (PPP) compares economic growth and standards of living in different countries with a common currency/basket of goods approach.

Currencies can. fluctuate for all sorts of reasons. If the dollar rises tomorrow relative to the world our standard of living hasn’t risen. It’s the same as before

Average currency rates absolutely affect (and reflect) standard of living! If a country is doing poorly, their currency falls, and they can buy less, and imported goods become more expensive there. In many ways, average exchange rates are a good indicator of the relative economy of a country!

Sure! One of the factors affecting PPP is exchange rate. (It's not the only factor.)

Next you're going to tell me that the UK, the world's sixth largest economy, is not actually poorer than Mississippi.

www.ft.com/content/e5c7...

So after accounting for PPP it turns out that the UK is richer than Mississippi, but not as rich as Alabama.

Yes but I think even these PPP comparisons have their limits, in my opinion. Life expectancy in the UK is much higher than in the U.S. Even the poorest parts of the UK are better than the average U.S. in life expectancy. Perhaps a separate issue, but in short, I would prefer UK to Alabama

I don't think the question is "Which place is preferable?" The question is "Does the GDP of the UK meet expectations?" Most would expect per cap GDP in the UK to be higher than in Alabama of all places. But it isn't. So what's holding the UK back?

Yes that's fair!

I *knew* that "fact" was weird.

A large economy (high GDP) and poverty (low GDP per capita) can easily go hand in hand. For example, China's economy dwarfs that of Massachusetts, yet Massachusetts is richer.

Are they literally just cherrypicking exchange rates to make this point?

I'm sure it was convenient the numbers lined up back then, too, but yeah, they managed to pick the single worst year for the USD against the Euro as their baseline.

How does that chart go back past 1999? Are they tying it to ERM1 or something?

It looks like there were a couple European pseudocurrencies before the euro tied to a basket of member state currencies and intended to stabilize exchange rates, later exchanged 1:1 for EUR, so I assume it's based on that

Makes sense. Explains why the Euro ended up valued what it did at the outset too. I know all the BENELUX currencies were pegged to each other and accepted in any of the three countries back in the day.

I am also wondering why I am seeing these non-PPP comparisons constantly

Sub tweeting (sub-skeeting?) the distinguished Mr Zakaria?

Do you have the data for the UK to add to this graph?

i think its too low to appear on the graph

Well it would be because these are absolutes, and the UK is a fifth the size of Euro area/US. But per capita, it's like this.

That’s great, thanks. And the divergence is Brexit I guess?

Instructive that, pre-divergence, Brits were actually making slightly *more* than their fellow Europeans. Really reinforces the fact that much of this populist crap is driven not by ordinary people but by rich folks who think they should be royalty.

Unclear, but @sjwrenlewis.bsky.social estimates the macroeconomic impact of austerity + Brexit of a similar magnitude to the divergence observed (arguable whether similar pandemic mistakes were made across Europe too). bsky.app/profile/sjwr...

ICYMI: The macroeconomic cost of Conservative government mainlymacro.blogspot.com/2024/06/the-... By 2024 I estimate GDP was 5% lower as a result of austerity, Brexit and pandemic mistakes. All three major policy errors show a government overriding expertise for ideological/political objectives.

The macroeconomic cost of Conservative governmentmainlymacro.blogspot.com During this election period there has been plenty of analysis that looks at how the economy has performed since 2010 ( the IFS here for exa...

Index 2008 to 100 and you are good to go

That looks like it is from “our world in data” which has the data for you!!

Thank you!

kind of hard to eye ball the difference there, is there a delta graph?

I am pleased to see the term factoid used properly. For example, a spheroid is something that resembles a sphere. A factoid is something that resembles a fact.

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