PPP demystified

It is clear from the comment section to the previous post that there is a lot of confusion about PPP.  Let me try to illustrate the basic ideas with an example, since my words don’t seem to be making an impact.

Assume that Saudi Arabia has a nominal GDP of $1000 billion, of which $600 billion is non-oil output and $400 billion is oil output.  Let’s assume that the domestic and international prices of oil are the same for Saudi Arabia, but that other goods are 3.5 times as expensive in the US as in Saudi Arabia.  In that case the Saudi GDP in PPP terms would be:

3.5 X $600b + $400b = $2500b

You might think about there being a “multiplier” of 3.5 for non-oil output, and a multiplier of 1.0 for oil.  The overall multiplier is 2.5 = $2500b/$1000b.

Now suppose you want to find the non-oil GDP in PPP terms (which I assumed was $2100b), how do you do that?

You started with the total output (from the IMF or World Bank) in PPP terms, which is assumed to be $2500b.  Then you subtract the output from the oil sector, using international prices.  In this case I assumed the domestic and international prices were identical.  Now suppose the domestic price of oil in Saudi Arabia were less than the international price.  In that case you’d want to subtract out oil at the international price, not the domestic price.  Do all PPP prices or all nominal prices; don’t mix the two.

Some commenters wanted to subtract the oil sector from nominal Saudi GDP.  But I’m not interested in nominal Saudi non-oil output; I want PPP non-oil output.  And if you apply the overall 2.5 multiplier to the non-oil sector, you get the wrong answer, as the actual multiplier is 3.5 for the non-oil sector (by assumption), and 2.5 for the total economy.

This is from a recent article in the Economist:

Cheap oil is forcing Gulf monarchs, who have hitherto bought their people’s acquiescence with cushy jobs and handouts, to trim the public payroll. And since Gulf monarchies cannot find enough jobs for their own people, the safety valve of emigration to work in the Gulf has closed to other Arabs. The largest Gulf state, Saudi Arabia, needs to create about 226,000 new jobs every year, according to Jadwa Investments, a Saudi research firm. But in 2015 employment rose only by 49,000.

Gulf states have set quotas for the employment of nationals, but many companies complain that local graduates lack the skills and work ethic required. “I know of firms that pay Saudis to satisfy the law, but tell them to stay at home,” says one businessman.

Now of course the foreign workers in Saudi Arabia are a different story.  But many of them are low skilled construction workers, maids, etc.  So I still find it kind of amazing that Saudi resident workers seem to be more productive than German workers, even if you exclude the entire oil production industry from the Saudi data. But that’s just me.

Or maybe (more likely) the IMF/World Bank/CIA PPP estimates are all inaccurate.

Also note that having lots of money doesn’t magically solve productivity problems. Countries in the “middle income trap” are often saving enough so that they ought to be catching up to the developed world.  The fact that they are not doing so suggests that productivity problems are much deeper than a lack of money.

If I had to argue against my anti-Saudi prejudice, here’s what I’d say:

Some places are unsentimental and very smart.  They realize that they can have living standards far above New York City through international labor arbitrage. They understand that NYC does not have “nice things” like good subways and good roads and good airports, because they insist on using union workers and local firms that are not skilled at building subways.  So the subways cost three times more than even in Europe.  These unsentimental smart places like Singapore and Dubai realize that they can bring in the best foreign firms and very cheap construction labor from Asia, and build great infrastructure for low prices.  If you then price the output of the infrastructure at America prices, it looks really impressive. So maybe the Saudi’s really are highly productive, because they do this sort of labor arbitrage.  They sell oil at American prices, and hire Bangladeshi construction workers at 5% of American wages.  Sounds good to me!

When I read Dems (and Trump) talk about the need to build infrastructure in order to create “jobs”, I’m reminded of Milton Friedman’s famous joke.  If you want jobs, use spoons.  If you want NYC to have nice infrastructure, use Bangladeshi workers.

PS.  I just saw this, from the WSJ:

The Wall Street Journal reached out to 45 economists who have served on the White House Council of Economic Advisers, under both Republican and Democratic presidents, to ask about this year’s presidential election. Most Democratic appointees said they supported Hillary Clinton, while no Republican appointees openly supported Donald Trump.

I know, the experts have “screwed things up” so why not give outsiders an opportunity?  Yes, instead of being screwed up as we are in America, we can have a policy-making apparatus run by non-experts, and get screwed up in the way that non-expert dominated places are screwed up, as in North Korea, or Venezuela, or Zimbabwe.

When you are a country that is already in the 97 to 99 percentile of the global economy, in terms of overall economic success, I’m not sure you want to just kick out all the experts and try something completely new.  Your upside if it works might be Singapore or Switzerland.  But your downside risk . . . ?

I wrote this back in 2011:

Now let’s start down through Dante’s seven circles of Hell:

1.  The US is much richer than Mexico.  So much so that millions of Mexicans will risk the horrors of human trafficking into the US to get crummy jobs picking tomatoes all day in the hot sun.

2.  China in 2011 is still considerably poorer than Mexico.  The Chinese take much greater risks to get here.

3.  China today is so much richer than China in 1997 that it’s like a different planet.  The changes (even in rural areas) are massive.

4.  The China of 1997 seemed like paradise compared to the China of the 1970s.  Throughout Hessler’s book, people keep talking about how horrible things were during that decade and how prosperous they are now (1997 in Sichuan!)

5.  The China of the 1970s was nowhere near as bad as during 1959-61, when 30 million starved to death.

It’s a loooooong way down to the lower percentiles.

PPS.  Yes, I know, there were nine circles.  I have a bad memory.


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41 Responses to “PPP demystified”

  1. Gravatar of Chuck Chuck
    27. August 2016 at 08:44

    Maybe the rumors of the Saudi royals being cryptos are true.

  2. Gravatar of Jacob A Geller Jacob A Geller
    27. August 2016 at 09:05

    Hi Scott,

    Your “unsentimental and very smart” story seems likely to explain some of the difference. Maybe not all, but a lot.

    Saudi Arabia finances nearly 100% of its public sector using oil income, so its tax rate is close to zero percent. If taxes of any kind (especially income taxes or VAT, as in the West) have any effect on productivity, this alone raises Saudi productivity.

    The Saudi labor force is about 80% non-national, so to a significant extent the Saudi government is selecting its own labor force. Surely they select for productivity, even among the pool of possible low-productivity laborers that they could import. And while yes the lower-productivity workers are still less productive than a typical German worker, they probably work more hours, which shows up as a lot of GDP, though not as high productivity…

    Saudi Arabia is also a lot younger than Germany, and in prime working age… Probably also increases GDP, but again not productivity…

    Saudi Arabia has some non-oil natural resources as well, though I’m not sure how much that explains.

    Saudi Arabia’s labor force is overwhelmingly urban and engaged in the service sector, though I’m not sure this explains much either.

    Finally, FWIW, the Big Mac index puts the Saudi price level at more than 3/4 of Germany’s, suggesting that the IMF’s estimate of something more like 1/4 may be (way) off.

    My (not very confident) suspicion is that a) Saudi productivity is higher than commonly assumed, though not as high as Germany’s, and b) the IMF’s estimate of the price levels in Saudi Arabia, Germany, et al are well-informed but inaccurate guesses.

    PS – I live in Thailand and I see evidence all the time that, as I like to put it, “Thais are really good at being poor.” Which is a cheeky way of saying that Thais do an awful lot to improve their material standard of living in ways that I suspect do not show up in GDP statistics, even (especially?) among poorer Thais. Things like bathing several times per day, carving the handle of a knife so that it’s beautiful, keeping the area in front of the house very clean, etc. I don’t mean to say that Germans or Saudis are doing things that aren’t necessarily well-captured in GDP statistics, I just bring this up to say that, anecdotally, it looks to me like coming up with accurate GDP statistics and accurate price indices *should* be really, really hard, especially in “low-information” environments, which seems relevant to this discussion.

  3. Gravatar of E. Harding E. Harding
    27. August 2016 at 09:30

    “I know, the experts have “screwed things up” so why not give outsiders an opportunity? Yes, instead of being screwed up as we are in America, we can have a policy-making apparatus run by non-experts, and get screwed up in the way that non-expert dominated places are screwed up, as in North Korea, or Venezuela, or Zimbabwe.”

    -Instead of making stupid parallels (BTW, North Korea is an expert-dominated place, Trump ain’t gonna run for a third term, though Clinton will probably do so indirectly, and neither Hugo Chavez nor Mugabe were ever billionaires), look at where Donald Trump and the experts have disagreed. Cutting rates in January of 2008. The future of Libya, as judged from the perspective of August 2011. NAFTA (though that one is ambiguous). Whether Donald Trump could win the Republican nomination.

    The closest American parallel to Trump (who won) is Andrew Jackson, as he was also (for the time) a billionaire with an experience in debt-finance, though with far more principle and political and military experience. He was one of America’s best presidents. Woodrow Wilson and GWB had similar constituencies among the poorly educated, but just didn’t have that kind of anti-establishment vibe that characterized Jackson (one was an academic, the other a political dynast). Trump does have the Clevelandesque anti-corrupt-establishment vibe, and both were New Yorkers, but any analogies between Trump and Cleveland can only be strained ones.

    The more I look at the world, the more I see that intellectuals are generally f*gs who want to destroy the world and ought to be expelled from any sensible institutions.

    “Also note that having lots of money doesn’t magically solve productivity problems.”

    -Sure it does.

    “So maybe the Saudi’s really are highly productive, because they do this sort of labor arbitrage. They sell oil at American prices, and hire Bangladeshi construction workers at 5% of American wages. Sounds good to me!”

    -Yeah; that was what I was thinking.

  4. Gravatar of E. Harding E. Harding
    27. August 2016 at 09:43

    Actually, the National Republicans did charge Jackson for making ambiguous statements on the issues and then going with the smaller-government position on them when they didn’t expect him to. So even here, there are parallels with Trump.

  5. Gravatar of ssumner ssumner
    27. August 2016 at 09:44

    Jacob, Excellent comment, thanks. My only observation is that the youth of the Saudi population cuts both ways. It also implies lots of children, which should lower a country’s per capita GDP estimate, ceteris paribus.

    E. Harding, You said:

    “North Korea is an expert-dominated place,”

    ????????????????????????????

  6. Gravatar of E. Harding E. Harding
    27. August 2016 at 10:39

    “????????????????????????????”

    -What? Are you denying experts plan and run all aspects of the economy there? North Korea didn’t build nuclear weapons by not being dominated by experts.

  7. Gravatar of Alexei Chmelev Alexei Chmelev
    27. August 2016 at 12:26

    There is indeed a lot of confusion about PPP from your previous post, Scott, but this confusion ist entirely on your part.

    You seem to think that there is some meaningful difference between the nominal GDP, a.k.a as GDP at current prices, and the GDP PPP, but there is no real difference at all, GDP PPP is just the nominal GDP expressed in a different unit of account, namely the US$ at the PPP exchange rate as opposed to the national currency.

    To get the GDP PPP number you have to take the nominal GDP in national currency and divide it through the so called PPP conversion factor (the PPP exchange rate).

    Example for Saudi Arabia:

    Nominal GDP 2015: 2,432,507 Million SAR (source: http://www.stats.gov.sa/en/1807)

    PPP Converion factor 2015: 1.44 SAR per US$ (source: http://data.worldbank.org/indicator/PA.NUS.PPP)

    GDP PPP 2015: 1,682,296 Million US$
    Population 2015: 31.5 Million
    GDP PPP per Capita 2015: 53,406 US$

  8. Gravatar of Benjamin Cole Benjamin Cole
    27. August 2016 at 12:30

    Yes, Saudi Arabia imports the bulk of its labor force, and many live in labor camps and work very hard. No First World bureaucracies, labor rules etc. Not sure how offshore investment income plays in.

    On experts….well….which topic? Experts brought us Afghanistan, Iraq, Vietnam. A chronically tight monetary policy.

    Remember, experts often become influential through patronage.

  9. Gravatar of Rajat Rajat
    27. August 2016 at 13:35

    Apart from unionised and generally expensive labour, it might be something to do with undemocratic regimes. In Singapore, if a new subway line needs to be built, they flag it a bit in advance and then just do it. Most people live in government-subsidised high-rises anyway, so they don’t stress or complain about loss of views, etc. In Australia, if the government wants to built a new road or rail line, even if they flag it years in advance, people complain and the government spends years on community consultation and environmental impact studies.

  10. Gravatar of BJ Terry BJ Terry
    27. August 2016 at 14:12

    It seems to me, conceptually, that the PPP adjustment is probably calculated based on a consumption basket of goods, not based on the goods produced in the country. Since Saudi Arabians aren’t using all of the oil that they produce, it would seem weird to use a PPP adjustment that is biased so heavily towards their oil production. If everything in your country is half the price it is in other countries, that money you make from selling your oil goes twice as far when it comes to purchasing normal consumer goods.

  11. Gravatar of H_WASSHOI H_WASSHOI
    27. August 2016 at 14:15

    Oh..I remembered.

    I was so impressed by the building cost of Burj Khalifa.(UAE)
    https://en.wikipedia.org/wiki/Burj_Khalifa

    Very cheap…If it was made on Japan…

    https://en.wikipedia.org/wiki/Tokyo_Skytree

  12. Gravatar of LK Beland LK Beland
    27. August 2016 at 14:42

    I thought that the PPP ratio was designed to adjust the final consumption expenditure (and not what is actually “produced”), which, in Saudi Arabia, obviously does not include the vast majority of the oil they produce…

  13. Gravatar of ssumner ssumner
    27. August 2016 at 15:08

    Harding, Not only do I deny it, I find the idea comical.

    Any policymakers don’t build nuclear bombs, scientists and engineers do. Do you really think they have skilled economists doing economic policy?

    Alexei, You said:

    “GDP PPP is just the nominal GDP expressed in a different unit of account, namely the US$ at the PPP exchange rate as opposed to the national currency.”

    No, I was working with nominal and PPP figures expressed in the same unit of account, the US$, from Wikipedia. No need to make things even more confusing by bringing in exchange rates.

    Ben, And what are your model countries not run by experts? Venezuela? Zimbabwe. You can’t beat something with nothing.

    Rajat, Yes, that’s part of the problem.

    BJ and LK, They may well being doing that, but it would be wrong. GDP is not about living standards, it’s about production. Your method might work for consumption in PPP terms. The “P” in GDP stands for production.

  14. Gravatar of LK Beland LK Beland
    27. August 2016 at 16:07

    From the OECD:
    “The PPP for GDP covers both final consumption expenditure (household and government) and gross capital formation.”

    If you account GDP with the expenditure-based method, the weight of oil is small in the PPP for GDP calculation.

    http://www.oecd.org/std/purchasingpowerparities-frequentlyaskedquestionsfaqs.htm#FAQ8

  15. Gravatar of E. Harding E. Harding
    27. August 2016 at 16:40

    “scientists and engineers do”

    -And these aren’t experts?

    “Do you really think they have skilled economists doing economic policy?”

    -Of course. This applies to every Eurasian socialist country, from Albania to East Germany to Mongolia (though here expertise was weaker than in most Eurasian socialist countries) to North Korea. North Korea was founded on the basis of “scientific socialism”, which necessarily relied on experts running things. Obviously, the economists are educated in different things than ones in capitalist countries, but it’s still impossible to deny North Korea’s economy, to an even greater extent than China’s, is one run by experts. North Korea announced a new five-year plan just this year.

    “And what are your model countries not run by experts? Venezuela? Zimbabwe.”

    -Jacksonian America. China, which, unlike the U.S., had a comprehensive civil service testing structure, was more expert-governed at the time.

  16. Gravatar of Gary Anderson Gary Anderson
    27. August 2016 at 16:42

    Trump is on Fox with fellow serial liar Hannity, and parents who tragically lost children to illegal aliens. Yet Texas loses and lot of children to all manner of crime, as Texas has a massive below poverty population.

    Texas has failed lots of people, and the most astonishing thing about Texas, 17.2 percent of its population lives below the poverty line:

    “More people are living below poverty in Texas than the combined populations of Los Angeles and Detroit.
    More people are living below poverty in Texas than the combined populations of Los Angeles and Detroit.
    Reuters/Larry Downing

    The percentage of people in Texas living below the poverty level is estimated at 17.2%. That’s 4.72 million people.

    There are 3.97 million people in Los Angeles and 677,116 people in Detroit.

    Source: US Census”

    http://www.businessinsider.com/incredible-facts-about-texas-2016-8/#the-population-of-hispanic-and-latino-people-in-texas-is-greater-than-the-population-of-georgia-8

    That means that well over 3 million non illegal aliens live below the poverty line, and I am sure that many illegals may live above the poverty line.

  17. Gravatar of Christian List Christian List
    27. August 2016 at 17:13


    So maybe the Saudi’s really are highly productive, because they do this sort of labor arbitrage. They sell oil at American prices, and hire Bangladeshi construction workers at 5% of American wages. Sounds good to me!

    That’s one way to phrase it. Another way to phrase it is that only 30-40% of working-age Saudis are actually working. And “working” in those cases actually means that they got government jobs that mainly exists on paper only. Yet another way to phrase it is that most native Saudis are unwilling to take service and manual labor jobs. They are also unable to take skilled technical jobs because most Saudi graduates are trained in religious subjects. In the private sector approximately 90% of the employees are still foreigners. The lowest workers are often coming from countries like India, Pakistan, Egypt, Sudan, Sri Lanka and have to work under conditions that can be best described as slave labor. Of course you can be very productive with slaves but this whole scheme is based on oil and will most likely collapse as soon as there’s not enough oil to sell.


    Yes, instead of being screwed up as we are in America, we can have a policy-making apparatus run by non-experts,

    I don’t see why Hillary would be an expert? An expert in what? Corruption? Running a private e-mail server to hide that corruption? Angela Merkel isn’t an expert either except maybe Physical Chemistry (but even this she hides splendidly). We live in a democracy and not in an expertocracy. There are more than enough experts in all the government agencies already. It’s not so uncommon that the leading politicians aren’t experts in public services, law or politics. What was the area of expertise of other leading US politicians like Bush II, Reagan, Carter, Eisenhower? Drinking, acting, preaching and invading other countries?

  18. Gravatar of Jerry Brown Jerry Brown
    27. August 2016 at 18:02

    The title “PPP demystified” may be too ambitious considering that I am in your audience.

    Regardless of that, isn’t PPP more a tool designed to compare living standards between countries? Can’t the problem be that you are trying to use it to measure productivity rather than what it was designed to attempt to measure? I mean that I use tools all the time at work, and I can guarantee that you would not get a good result if I used a sledge hammer to sink trim nails on crown moldings rather than a finish nailer. And you wouldn’t be happy paying me to demolish walls with a trim nailer either.

  19. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    27. August 2016 at 18:26

    I wonder no one do all in SDR.
    Anyone?

  20. Gravatar of Jacob A Geller Jacob A Geller
    27. August 2016 at 19:42

    @Jerry Brown,

    You can think of PPP as a tool that converts nominal GDP into real GDP, for the purpose of making international GDP comparisons. The key ingredient is the price level — if two countries have the same nominal GDP per capita of $25,000, but prices are twice as high in Country A as in Country B, then in real terms (i.e. in terms of what stuff can be bought with that nominal GDP) Country B actually has twice the GDP as Country A. And so we say that Country B has a per capita GDP *PPP* of $50,000.

    So PPP measures neither living standards (which are correlated with GDP but are not exactly the same thing), nor productivity (which would require some estimate of the labor hours required to produce that GDP).

    PPP *just* converts NGDP into RGDP for purposes of making international comparisons. It ignores labor hours, productivity, or what is done with the GDP.

    And as Scott pointed out yes, the P in “GDP” stands for product. It’s just the value of everything produced in the country. And it’s agnostic about whether that product is for purposes of consumption, or investment, or wearing as a funny hat for two minutes and then flushing it down the toilet. It’s just the value of everything produced, all of it, for all purposes.

  21. Gravatar of Benjamin Cole Benjamin Cole
    27. August 2016 at 19:48

    Scott-

    As I have said, I think vulgar Marxist analysis explains 90% of politicc-economic posturing, even though Marxist medicines are poison.

    Ergo, “experts” in the USA are more often just mouthpieces for interest groups (left- and right-wing, or no-wing just self-interested).

    Ergo, ergo, American is not run by experts anyway. It is run by interest groups. Is this is even debatable?

    Does the USDA and US farm policy reflect free market ideals?

    How else to explain property zoning, the criminalization of push-cart and/or truck-vending, perennially tight money and $10 trillion wasted in Afghanistan, Iraq and Vietnam?

    My conclusion is that they have really stupid and narrow interest groups running Venezuela and Zimbabwe. probable those groups have “experts” they foist on the public to explain what they are doing.

    I assume the old Soviet Union had “experts.” China today has “experts” running the shop.

    Actually, this topic and context will addle thinking. What is an “expert” anyway?

    And if one “expert” has an opinion diametrically opposed to another “expert,” then what is “expert opinion”?

    Egads, I have a headache.

  22. Gravatar of Anon39 Anon39
    27. August 2016 at 20:00

    Dr. Sumner,

    Insightful as always. The Economist and its Big Mac index is useful in two ways: It shows a hilariously banal way to compare prices (1) and also suggests the futility in accurately comparing costs of living in different countries (2). There is only so much our statistical wizardry can accurately measure. PPP estimates are wildly off in a multitude of ways. The question is what do we do with the data we have. My answer, FWIW, is to be extremely humble when using hard to measure aggregate statistics. I guess I owe that to being a long time reader of Dr. Kling.

    Regards,
    Anon39

  23. Gravatar of Anon39 Anon39
    27. August 2016 at 20:06

    Probably a waste of a post. I attempted to leave a comment regarding PPP, and it showed my comment was awaiting moderation. Now it appears to have disappeared. There was neither an ad hominem attack on anyone nor a negative view of Dr. Sumner nor any commenter. Maybe I do not understand the rules?

  24. Gravatar of Jerry Brown Jerry Brown
    27. August 2016 at 21:17

    Jason thank you. But isn’t RGDP real stuff as in the tons of steel a country produces or the number of cars or the amount of haircuts or apples or whatever? NGDP is the current price of that stuff expressed in terms of a nations currency. Productivity would be a measure of the resources required to produce those things in terms of a ratio? PPP always mostly seemed to me to be an extrapolation of other measurements in an attempt to reconcile different price levels between countries and currencies as way to compare peoples actual costs of living. It might be decent for that purpose, but there will be measurement errors with any tool and measurements extrapolated from previous measurements will no doubt compound those errors. To extrapolate further from PPP to try to determine productivity seems risky. If I was building your house you might want me to find a better way to measure things.

  25. Gravatar of Jerry Brown Jerry Brown
    27. August 2016 at 21:23

    Darn it Jacob I screwed up. I meant Jacob not Jason. Sorry.

  26. Gravatar of Ray Lopez Ray Lopez
    28. August 2016 at 00:21

    @Jacob A Geller – I lived in Thailand too, it sucked. Thai turkey farmer Ben Cole likes it but the Philippines is much better for me. Your comment is also ignorant because you should be aware the GDP does not capture “black market” stuff like moms taking care of kids, keeping the lawn nice with manual labor not paid for, keeping tools shiny, and so on.

    Sumner’s example was excellent but note: “Let’s assume that the domestic and international prices of oil are the same for Saudi Arabia, but that other goods are 3.5 times as expensive in the US as in Saudi Arabia. ” There’s a reason often why the goods and services are three times more expensive in the USA: you are paying for quality. I admit, sometimes you overpay for quality, but would you pay 50 cents for a haircut in Thailand, from an apprentice barber who, when she finished, looked like she put a bowl over my head and cut around the edges? My friends laughed for a week (so did I). You get what you pay for. I once got eyeglasses in Thailand and found they did not have the “automatic sun-glass darkening film when you use the glasses outside” that I paid for. They did not include this coating despite me paying extra. And there’s no consumer protection in Thailand (nor really anywhere outside the First World countries), no refunds, no nothing. I got shafted. Very common story BTW. Lawyer services in Greece for example: ask two lawyers the same question, get radically different answers, though they only charge about $15 for advice. That said, the law in Greece is “malleable” (for a bribe) so perhaps that’s why, but my point is goods and services outside the USA are not the same as in the USA. Caveat emptor. I would get a dental cleaning in Thailand (and did, though the dentist did not remove all the plaque properly I was told by a US dentists shortly thereafter) but I would not get open heart surgery. PPP = fake comparison.

  27. Gravatar of Jerry Brown Jerry Brown
    28. August 2016 at 05:41

    Wow. I shouldn’t write comments after midnight. They turn out stupider than usual. Jacob, please forget my comment from last night if possible. I was needing more than a little demystification apparently.

  28. Gravatar of ssumner ssumner
    28. August 2016 at 06:26

    LK, GDP also includes net exports, where oil looms large. Again, GDP measures total PRODUCTION.

    Harding, You said:

    “And these aren’t experts?”

    Nice try, but I referred to the “policy making apparatus”. No, they are not policymakers.

    Not sure if you are being intentionally misleading . . .

    Christian, You said:

    “Of course you can be very productive with slaves”

    Actually, you cannot.

    And Hillary knows 100 times more about policy than Trump, and would hire much more qualified advisors. Skilled economists don’t want to work for Trump, and his actual advisors are mostly incompetent.

    Jerry, PPP can be and is used for many different purposes. And see Jacob’s excellent reply.

    Ben, It’s all a matter of degree. Which countries do you think do best?

    Anon39, New commenters need to be approved on their first comment. Also comments with lots of links.

    Ray, A $4 haircut in Beijing is better than a $20 haircut in the US.

  29. Gravatar of Alexei Chmelev Alexei Chmelev
    28. August 2016 at 07:15

    @Scott

    “No, I was working with nominal and PPP figures expressed in the same unit of account, the US$, from Wikipedia. No need to make things even more confusing by bringing in exchange rates.”

    I don’t think exchange rates confuse things, rather they clarify them in this case.

    As for your figures, again, they are the same expressed in different units of account: your nominal figures are expressed in (current) US$ while PPP figures are expressed in so called international $ (https://en.wikipedia.org/wiki/Geary%E2%80%93Khamis_dollar).

    Again for Saudi Arabia:

    Nominal GDP 2015 in local currency unit: 2,432,507 Million SAR (source: http://www.stats.gov.sa/en/1807)

    Average market exchange rate to US$ 2015: 3.75 SAR per US$ (source: http://data.worldbank.org/indicator/PA.NUS.FCRF)

    PPP Conversion factor 2015: 1.44 SAR per international $ (source: http://data.worldbank.org/indicator/PA.NUS.PPP)

    GDP nominal in current US$: 6,486,69 US$
    GDP PPP 2015: 1,682,296 Million international $

    You howeever add the value of the non-oil output in international $ with oil output in US$, which can not yield something meaningful.

  30. Gravatar of Benjamin Cole Benjamin Cole
    28. August 2016 at 08:41

    Scott:

    Which countries do best?

    Why don’t you ask me a big question?

    Here is a funny one: my guess is oil-exporting countries did fine by their populations by eschewing free-trade principles and instead forming a cartel. Exception to the rule.

    Have the export-driven economies of the Far East done well on behalf of their populations? I guess the answer is yes. China is amazing. Japan.is a personal favorite. Korea is terrific.

    Thailand has no unemployment and chronic labor shortages. I like the result that has on the population. Living standards are rising from what see. I leave the key in the motorcycle ignition permanently, parked out front. Dissidents can die, however.

    The US may be slipping backwards. Europe too.

    The sad truth is that large swaths of the planet are horrible. Africa, Latin America, Mideast.

    The globe’s major central banks have a solid front, arms linked against prosperity. Are experts in charge of central banking?

  31. Gravatar of Gary Anderson Gary Anderson
    28. August 2016 at 09:21

    @Benjamin You said something true, that major central banks have a solid front, arms linked against prosperity. This too big to fail, with high profits for most of them, comes with the placing of risks with the counterparties. Banks don’t take risks, only counterparties take risk. Greenspan planned that way back and even revealed it:

    “Derivatives have permitted the unbundling of financial risks. Because risks can be unbundled, individual financial instruments now can be analyzed in terms of their common underlying risk factors, and risks can be managed on a portfolio basis. Partly because of the proposed Basel II capital requirements, the sophisticated risk-management approaches that derivatives have facilitated are being employed more widely and systematically in the banking and financial services industries.

    To be sure, the benefits of derivatives, both to individual institutions and to the financial system and the economy as a whole, could be diminished, and financial instability could result, if the risks associated with their use are not managed effectively. Of particular importance is the management of counterparty credit risks. Risk transfer through derivatives is effective only if the parties to whom risk is transferred can perform their contractual obligations. These parties include both derivatives dealers that act as intermediaries in these markets and hedge funds and other nonbank financial entities that increasingly are the ultimate bearers of risk.”

    And why, Benjamin, did Greenspan create this monster? It is because he wanted risk to go away from the banks themselves, as he lived through the S&L disaster. He created TBTF. He made it happen and now hedge funds are very risky, indeed.

    http://www.talkmarkets.com/content/bonds/hoarding-the-new-gold-early-history-about-structured-finance?post=101531&uid=4798

  32. Gravatar of Christian List Christian List
    28. August 2016 at 10:35


    Actually, you cannot.

    Saudi Arabia proves that you can. At least when you got other riches like oil as well. And the Hajj, don’t forget about the Hajj. But still: 90% of their exports are oil and its products. It’s all based on their oil and a little black stone in the Kaaba.

  33. Gravatar of Christian List Christian List
    28. August 2016 at 10:45


    And Hillary knows 100 times more about policy than Trump, and would hire much more qualified advisors

    I agree that it might be a little too late to learn politics when you are US President. Bush II and Reagan had no clue about politics either but they learnt most of the stuff before they became US President. It’s still not impossible though. Politicians like Schwarzenegger got elected with zero experience and still did pretty well. And believe me I was the last person at that time who thought that something like this would be possible. But it was.

    @Ray Lopez
    American pizza sucks and you know it. It’s not even pizza.

  34. Gravatar of E. Harding E. Harding
    28. August 2016 at 11:03

    “No, they are not policymakers.”

    -Of course they are. You think the Great Dictator makes all the plans himself?

    “Actually, you cannot.”

    -Yes, you can.

    “And Hillary knows 100 times more about policy than Trump,”

    -I haven’t seen that at all. Trump instinctively understands “wages are too high”; Her thinks a higher minimum wage boosts AD. Trump, Obama, and Putin all instinctively understand foreign policy (judging by their statements), Her doesn’t. Her is a good debater, and Trump isn’t, but that’s about it.

    “and would hire much more qualified advisors.”

    -Like Victoria Nuland, Paul Krugman, and Joe Stiglitz?

    “Skilled economists don’t want to work for Trump, and his actual advisors are mostly incompetent.”

    -When Trump wins, that’ll change -fast.

  35. Gravatar of Gary Anderson Gary Anderson
    28. August 2016 at 14:41

    @Harding:

    You said: “-Like Victoria Nuland, Paul Krugman, and Joe Stiglitz?”

    You know Victoria Nuland is married to a cofounder of PNAC, right Harding? Regime change is in their blood. That is what they do. That is the official policy of the USA and the War on Terror is just a diversion.

    PNAC called for a New Pearl Harbor one full year before 9/11 happened. You think that was an accident, Harding?

    And Nuland said the US gave billions to the opposition in the Ukraine, and we wonder why Crimea is part of Russia now.

    If Trump was not such an unstable fool, I bet he may understand some of the above. And I have never said I don’t agree with some things he says. He is just a mental basket case, and it is obvious watching him perform. Too bad he wasn’t a tolerant guy and would rather push peoples’ buttons than stand for the truth.

  36. Gravatar of Jacob A Geller Jacob A Geller
    28. August 2016 at 23:01

    @Harding, Trump said (that he meant that) the *minimum wage* was too high, not that wages were sticky or anything like that… Until he changed his mind and came out in favor of raising the federal minimum wage to “at least $10.”

  37. Gravatar of ssumner ssumner
    30. August 2016 at 09:24

    Ben, You said:

    “Have the export-driven economies of the Far East done well on behalf of their populations?”

    So why do you support a anti-trade candidate whose protectionist policies would reduce exports?

    Alexei:

    “As for your figures, again, they are the same expressed in different units of account: your nominal figures are expressed in (current) US$ while PPP figures are expressed in so called international $”

    It’s all US dollars, you are misusing the term “unit of account”. And I am not mixing apples and oranges. I either use all nominal, or all PPP.

    Christian, You said:

    “Bush II and Reagan had no clue about politics either but they learnt most of the stuff before they became US President.”

    The comparison of Trump to these guys is so absurd It’s hard to believe you are serious. Both of those Presidents read stuff on public policy. Trump never reads anything other than books of Hitler’s speeches.

    Harding, Policymakers are those that decide to build the nukes, not the engineers and scientists who actually do build them.

  38. Gravatar of Thiago Ribeiro Thiago Ribeiro
    31. August 2016 at 02:32

    “North Korea was founded on the basis of “scientific socialism”, which necessarily relied on experts running things.” –:E. Harding

    So were Kaganovitch (who oversaw the Moscow Metro building) and Beria, who oversaw the Soviet A-Bomb project, experts? They could overrule the experts as surely as Trump will or even more surely. In fact, the top Soviet guy, Stalin, made a career out overruling and crushing experts, such as former czarist officers who worked for Trotsky, people who said sudden and brutal forced collectivization would not be a good idea and geneticists. Who was the expert in nuclear matters? Khruschev or Sakharov, who was bitterly censored by the former for opposing the party line on nuclear weapons?

  39. Gravatar of Thiago Ribeiro Thiago Ribeiro
    31. August 2016 at 03:05

    “The comparison of Trump to these guys is so absurd It’s hard to believe you are serious. Both of those Presidents read stuff on public policy.”

    You know, you Americans are complicated. I remember reading a few years ago an article comparing then president Bush’s intuitive (or to be blunt, know-nothing) approach to Reagan’s careful, analytic decision processes. A few years before that, I read a Conservative (quoted by Colin Powell if I am not mistaken) wondering how Reagan could achieve so much while knowing so little while knowing so little (and some people assure us Bush II was the real intellectual giant: http://www.independent.co.uk/voices/commentators/bruce-anderson/mr-bushs-speech-in-london-showed-the-thinking-of-a-great-world-leader-79703.html ). And people still don’t seem to have make their minds about Ike.

    Maybe American presidents just get better as soon as they leave the White House (Carter and Nixon seem to be good examples), but life is too short to keep track of what Republican presidents know, don’t know, don’t admit knowing (Watergate, Iran-Contras and the Yellowcake fiasco) or have forgotten. If Mr. Trump gets elected, I am confident he will be saluted, four years from now, as one of the greatest Republican presidents America ever had.

  40. Gravatar of Matthias Görgens Matthias Görgens
    1. September 2016 at 04:08

    > Saudi Arabia finances nearly 100% of its public sector using oil income, so its tax rate is close to zero percent. If taxes of any kind (especially income taxes or VAT, as in the West) have any effect on productivity, this alone raises Saudi productivity.

    Jacob A Geller, that’s an interesting thought. Non-oil countries could emulate these effects by untaxing labour and capital, and shifting all the tax burden on land.

  41. Gravatar of Jason Jason
    2. September 2016 at 13:20

    I wrote one of the confused comments on the other post, so thanks for clearing that up. I understand where I went wrong now.

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