Archive | March, 2016

The 5th largest economy

24 Mar

The proponents of Brexit are fond of using the statistic that the UK has the 5th largest economy in the world. The trouble is that most people using this statistic have no idea what that means, who compiles the figures and what timespan the figure relates to.

Misused statistics are pretty dangerous things, so I decided to investigate whether the figure was true, what it represented an what other figures dispute this figure.

Well, the good news for the Brexit people is that the figure is kind of true, for 2014 at least:

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

There is an alternative method of counting in which the UK appears at No. 10:

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

Each method of counting has its own strengths and weaknesses and to use one figure without referencing the other is unhelpful in the debate.

This is a comment from the article about straight GDP: ‘Countries are sorted by nominal GDP estimates from financial and statistical institutions, which are calculated at market or government official exchange rates. Nominal GDP does not take into account differences in the cost of living in different countries, and the results can vary greatly from one year to another based on fluctuations in the exchange rates of the country’s currency.[2] Such fluctuations may change a country’s ranking from one year to the next, even though they often make little or no difference in the standard of living of its population.[3]

And this is about the adjusted PPP figure:

‘This article includes a list of countries in the world sorted by their gross domestic product (GDP), the value of all final goods and services produced within a state in a given year. The GDP dollar (INT$) estimates given on this page are derived frompurchasing power parity (PPP) calculations.

Comparisons using PPP are arguably more useful when assessing a nation’s domestic market because PPP takes into account the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates which may distort the real differences in per capita income.[1] It is however limited when measuring financial flows between countries.[2] PPP is often used to gauge global poverty thresholds and is used by the United Nations in constructing the human development index.[1]

The PPP represents real purchasing power rather than a notional unadjusted figure. To explain, if I go to a decent restaurant in London and try to buy a meal for 2 persons for $30 I am unlikely to be able to do it, while such a sum would buy a feast in many countries. So, saying that the earnings alone describe relative wealth is inaccurate.

Now take a look figure at the top of the lists in each article. The trading area which is the biggest, larger that the USA or China is, wait for it, the EU. So if we wish to leave the EU we risk leaving the LARGEST trading area in the world. That would be really stupid when there is no guarantee that we would be able to negotiate decent trading terms with other blocks.