Making cross-national comparisons using macro data

Unit 2

Dave Fysh

University of Portsmouth

• Problems of measurement in making comparisons• Where does comparative data come from?• Getting metadata• What series are harmonised?• Exchange rates as comparative data• Purchasing Power Parity exchange rates • PPP data series

We will cover

Comparing fruit diets

Bill Tanya

1 apple, 4 oranges 4 apple, 1 oranges

Concept

fruit 5 fruit 5 fruit

Measured Ratio

1 (equal)

vitamin C

(Apple 5mg per 100gOrange 50 mg per 100g)

1 X 54 X 50205mg

4 X 51 X 5070mg

0.341 Tanya gets 34% vitamin C of Bill

Measurement Problems

Same sized fruit? Bill’s oranges weight only 50g

Tanya’s apples weighs 200g

Bill gets105 mg vit. C Tanya gets 90mg vit.C

.857Tanya gets 86% vit.

C of Bill

Same period of time? Same quality of fruit?

Same standard of Testing fruit for

vitamin C?

Metadata and methodology Quality of measurement system

Common Measurement Standards

• ESDS International macro database publishes data series from 7 major IGOs and UK National Statistics time series data

Making cross-national comparisons

• 100,000s of series from all countries across the World

Where do they come from? State statistical agenciesIGO statistical departmentsOther international agenciesAcademic projectsCommercial organisations

What do the IGO statistical depts. do?Set quality standardsCollate and present dataTransform data if necessaryManage programmes to harmonise data

What is an IGO?International body founded by treaty or similar arrangemente.g. UN, IMF, WB, OECD, ILO,IEA, European Commission

• Locations• measurement dates • splicing methods

• base years and locations • methodologies

• presentational formats • treatment of missing or estimated data

Do series refer to comparable:

Not always!

• other matters

Some measurement difficulties in ESDS International macrodatabank series

Can we find information to detect incomparability?

Yes – in ESDS International there are a number of methods

Look at the header of a series in report or even the item list

Sweep the cursor over ‘numbered’ data cells

Click the information icon Go to the ESDS Information Users Guide

Go to the source documentation for the databank

Information obtained from these sources is called metadata.

Harmonised series

• OECD• IEA• Eurostat• IMF• ILO

publish many harmonised series.

If possible, use a single such databank when making comparisons

ConceptsFirst look at exchange rates

These transform incomparable national currency data to a common currency base

But exchange rates also carry comparative information themselves: they are comparisons

Consider the US dollar/pound sterling exchange rate:

Goes up from

$1.80 per £ to $2 per £

Tells us that £ holders can buy 11.1% more from US then previously for the same value of sterling

Brits are therefore wealthier compared to Americans than before

Note this is a relative statement – there is no information as to which country is absolutely wealthier

Limitations of exchange rate data

Market rates are volatile

All countries, permanently or from time to time seek to control market rates

So a lot of contextual information is required to interpret market exchange rates or official exchange rates as comparative information

Using exchange rates to produce a common currency base for cross

national comparisonIf all series denominated in local currencies could be expressed in a common currency then many sorts of comparison could be made.

But not only are market rates volatile, they don’t seem to be able to capture difference in price level between countries.But they should if goods were fully tradable and currency fully ‘convertible’

e.g. A watch in the UK costs £20, the same watch in China 30 yuan

At an exchange rate of 15 yuan per £, the watch costs only £2 to buy in ChinaIt seems likely that the exchange rate would change until the watch cost the same in China or the UK, or price of watches as measured in the two currencies equalised

What's wrong with market exchange rates as a basis for comparison?Flexible exchange rates don’t in fact equalise prices between countries

many goods are not traded between countries

Governments don’t allow them to be traded

the goods are inherently untradable

For example – a haircut!

The price of untraded goods will not be reflected in exchange rates

So the cost of living in one country will not be valued on a common basis with another if market exchange rates are used to convert one

currency into the other

because

Purchasing Power ParityStatisticians have found a way to avoid the problem of exchange rate imperfectionsA ‘PPP’ rate can be calculated from direct observations of prices, in local currencies of a similar bundle of goods in each country under comparison.

So if the bundle of goods was – a meal, a pair of jeans , a haircut

That might be observed to cost £25 in the UK and 100 yuan in China

The PPP exchange rate would be 4 yuan per £Provided the bundle of goods was sufficiently typical of consumption both in China an UK

The PPP exchange rate would provide a base for a genuinely common currency unit of account for China and the UK

Series such as GDP ‘deflated’ by this exchange rate could show real difference and similarities between the two countries

PPP exchanges rates and many series transformed to a common ‘unit of account are to be found in ESDS International databanks.

Using PPP exchange rate series creates additional series for apparently similar variables.

Have a look at the spreadsheet showing GDP measures for most countries in the World (LIMMD Materials Unit 3.8.4, first activity)

Which is the correct measure?

Purchasing Power Parity

Activities: Cross-national comparisons

1. Read LIMDD Materials Unit 3, section 3.7.3 and other parts of 3.7 and undertake the activities

2. Read 3.8.3 and undertake the activities3. Read 3.8.4, look at the first activity and undertake the second activity4. Read 3.5.5 and try out all the ways metadata can be obtained from ESDS

International macro databanks

Form groups and

Report back to the whole session on what you learned (or didn't!)