International Price and Quantity Comparisons: Purchasing Power Parities and Real Expenditures, Canada and the United States - ARCHIVED

Articles and reports: 13-604-M1993025


This article introduces two new tables showing volume indexes of real gross domestic product (GDP) per capita and its components for Canada compared with the United States and the associated purchasing power parities (PPPs). These international comparisons of real expenditures based on PPPs are considered to be a major addition to the tools available for macroeconomic analysis. For example, the recent publication by the International Monetary Fund (IMF) of a set of estimates of different countries' output using PPPs has changed the view of the share of world output that comes from the industrialized countries compared with the developing economies.

An analysis based on PPPs, rather than a more conventional one based on exchange rates, has significantly changed the relative measures of output of countries. Comparisons based on exchange rates are unlikely to fully take into account the differences in price levels between countries (i.e., the goods and services that can be purchased in one country's currency compared with another's). Moreover, services are not generally traded in the way that goods are, so their prices in different countries tend not to be related in a way that parallels the currency exchange rate. If aggregate output is to be properly compared across countries, PPPs become more and more important as the size of the service sector grows.

Economic theory would suggest that for internationally traded domestically produced goods and services, PPPs and exchange rates will tend to equalize in the long run. Exchange rates, however, can fluctuate widely in short periods and are affected by expectations and factors such as deficits, wars, fuel shortages and interest rates. With the calculation of PPPs, actual price level differences can be identified. Such measures are also much more stable over time.

Issue Number: 1993025
Author(s): Kemp, Katherine
FormatRelease dateMore information
PDFNovember 30, 1993