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 $1.35.

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 standards.

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?