World GDP should not be falling
|Date:||15 December 2015|
A recent discussion on VoxEU about trends in world GDP illustrates how the wider use of Purchasing Power Parities (PPPs) would lead to figures that are more readily plausible and easier to interpret.
In a recent column on VoxEU, Peter van Bergeijk remarked that nominal world GDP is falling in 2015, according to the IMF's World Economic Outlook. He also notes various earlier occassions when nominal world GDP fell. This is not impossible, but this seems inconsistent given that the IMF is predicting positive global real growth and positive global inflation for 2015. However, as soon clarified by a group of IMF economists, the reason for the apparent inconsistency is that the IMF uses current market exchange rates to convert national nominal GDP figures to US dollars. Since the dollar strengthened vis-a-vis most major currencies in 2015, those countries' nominal GDP at current US dollars declined. If the IMF were to denominate nominal world GDP in euros, 2015 would not show a decline.
However, this would merely shift, rather than solve the problem that IMF's nominal world GDP depends on the numeraire currency. A more attractive alternative would be to use PPPs to convert all GDP levels to a common currency. On a conceptual level, this is a more attractive option because PPP-converted GDP levels more properly reflect the amount of goods and services produced in an economy than exchange-rate-converted GDP levels – see also Timothy Taylor's contribution to this discussion, or here for a more basic overview. At a practical level, a PPP-converted measure could be constructed whereby the growth of nominal world GDP would be equal to growth of real world GDP plus world inflation (measured by the GDP deflator). As the figure to this post shows (based on preliminary estimates from PWT 9.0), a PPP-converted world GDP series would be larger – reflecting the conceptual advantage of the measure – and grow more smoothly – reflecting the practical advantage.