Rich, yes, but richer than the UK?

It’s possibly about time that we introduced The Guardian to the concept of exchange rates. To the little wrinkles and bits and bobs of exchange rates perhaps. For they’re claiming that the economy of California is larger than that of the UK. Which is might well be of course, it’s a notably richer place than most of the UK. Something that comes from the US being a more capitalist economy perhaps.

However, it’s not really quite like they think it is:

California’s economy has surpassed that of the United Kingdom to become the world’s fifth largest, according to new federal data made public on Friday.

Despite having a population of only 40 million compared with the UK’s 65 million people, California’s gross domestic product of $2.7tn has overtaken the UK’s $2.6tn.

The so-called Golden State’s GDP rose by $127bn in the period from 2016 to 2017, while the UK’s economic output fell slightly over that time when measured in US dollars, due in part to exchange rate fluctuations. British GDP has fallen steadily from $3tn in 2014, according to World Bank figures.

That due partly to exchange rate fluctuations, hmm. Putting “sterling dollar exchange rate” into the box of our favourite monopolist I get a little chart telling me that it was about $1.60 in 2014 (obviously, variations within the year) and about 1.35 now. So, a 15% decline in the exchange rate then.

$3 trillion to $2.6 trillion is a 13 % fall in GDP. We are measuring in USD recall, so we’ve found that the exchange rate difference more than covers the change in size of UK GDP.

It’s not “due in part” it’s “more than entirely due to” which is rather a different statement, isn’t it?

All of which is why we don’t use market exchange rates in the manner that The Guardian just has done. Instead we use purchasing power parity adjusted ones when we desire to compare across economies in this way. Sure, market prices are, by definition, always the correct prices. But we’re also aware that they can wander away from what we’re really trying to measure here, the value of production (or consumption, or incomes) in two different places. In the long term they’ll converge on PPP rates. And it’s also PPP rates which determine the incomes or consumption of the people, the thing we’re trying to measure.

The £/$ PPP rate is 0.70 or so, something which changes much less rapidly than market exchange rates. Or $1.43. So, the UK economy is now rather larger when expressed in the correct – for our purposes at least – exchange rate. Perhaps 5 or 6% larger, which usefully takes us past the size of California’s economy again.

But we should go one step further here as well. California’s part of a currency bloc, the $, and prices vary within that block too. PPP exchange rates are different in Mississippi than they are in California. Not that we do normally make these adjustments but we should do if we’re to be accurate. Our best guide to this being the variance in living costs – what a US$ is worth in each state.

$100 is worth, compared to the national price level, only $88 in California. It’s not entirely right to do this but it’s good enough, that means that the PPP exchange rate for California is 12% lower than that for the US as a whole. Or, the £/$ PPP exchange rate for GB/CA is 12% higher than that for GB/US.

Which is our final answer here. It’s not a perfect one, by any means. But when we try to compare what we want to compare, the sizes of the two economies using an exchange rate which measures the important thing – what’s the standard of living? – the UK economy is significantly larger than that of California. Of course, then we should get to per capita where CA wins. But that’s not what The Guardian was doing, is it?

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WindyPants
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WindyPants

Hi Tim. At the risk of sounding like a dumbass, why don’t we use GDP/person more? That is, after all, the figure most of us are interested in. It would also provide an incentive to curb immigration.

Or have I just answered my own question?

Bongo
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Bongo

State of California General Fund budget
2012 – 91.3bn USD
2017 – 125.0bn USD
US Federal spending ( don’t know what % of this goes to CA )
2013 – 3.45tn USD
2017 – 3.98tn USD
And that’s with supposed spending restraint.
I don’t know what the population growth was in the period – possibly 3%, and say inflation at 2% a year for 4 or 5 years, the budgets should not have advanced by this much.

Spike
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California is not a nation. The UK is. This means there is no point comparing the two, any more than comparing the UK to Left-Handed Americans except that each is a Thing and let’s see which one is bigger. The Guardian did use exchange rates, as it expressed its figures in USD. We are in a strong-dollar era, after 8 years of Bush trying to hand favors to his exporter cronies, then 8 years of Obama trying to wreck things. The exchange rate might not be a perfect measure, but it is, after all, the rate we have to use… Read more »