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The OECD and Eurostat (the European Union Statistical Office) jointly run a Program which provides international comparisons of GDP volumes and the associated price measures. It is commonly referred to as the 'OECD-Eurostat PPP Program'. Currently this Program is run every three years, with the latest completed round being in respect of 1999. It provides an important input into the ICP because it covers all 30 OECD Member Countries (which include all 15 countries in the European Union).
Average annual growth in GDP volumes (%)
The average annual growth in GDP volumes between 1985 and 1999 was 2.6% in Japan and 3.2% in the USA so, in the absence of significant structural change, the Japanese economy would be expected to have become somewhat smaller relative to the USA over the whole period shown above. As can be seen from the above table, this is in fact the case when the comparisons are based on PPPs (a decline in the Japanese economy from 35% of the size of that of the USA to 34%) but not with the exchange rate based comparison, which shows the Japanese economy increasing its size relative to the USA economy by about 50% (from 33% to 49%). In addition, the PPP-converted data show a fairly plausible relationship between the GDP for the two countries for each benchmark year when the relative rates of GDP volume growth are taken into account. There is a fairly sharp rise between 1985 and 1993 in the size of the Japanese economy relative to the USA’s when Japan’s growth rates were stronger than the USA’s, followed by a large fall from 1996 to 1999 when Japan’s growth rate was substantially lower than that of the USA. On the other hand, the exchange rate converted data show changes in the relationship of GDP between the two countries that are economically implausible, with the Japanese economy apparently doubling in size compared with the USA in only 8 years between 1985 and 1993. This was followed by a sharp reversal between then and 1999 but still leaving its size compared to the USA at an implausible level given the relative growth rates between 1985 and 1999.
A report (see footnote 1) to the March 2001 United Nations Statistical Commission stated that the statistical problems involved in using PPPs when making international comparisons are of a much smaller magnitude than those associated with using exchange rates in such analyses. The report presented an analysis of comparisons using physical measures of output and the usage of goods and services. It showed that, despite the data problems so often referred to when PPPs are mentioned, the PPP data at the level of GDP provide a much more plausible comparison between various pairs of countries than does a comparison based on exchange rates. The report reaffirmed SNA93 by recommending that PPPs rather than exchange rates should be used in international comparisons of real production and living standards because exchange rates produce distorted results. This report has been a very important step in gaining broad acceptance by both international institutions and national statistical offices of the need to use PPPs rather than exchange
rates in international comparisons.
1 United Nations Development Program Human Development Report: Report of the "Friends of the Chair" of the Statistical Commission (Item 6(e) of the provisional agenda of the 32nd session of the United Nations Statistical Commission, 6-9 March 2001).