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FRBSF

WEEKLY LETTER

Number 91-34, October 4,1991

I nternational Output Comparisons
Is the u.s. in long-term economic decline?
Many would point to the narrowing of income
level differences between the United States and
other industrial countries during the post-World
War II period as evidence that it is.

say, 1980 requires converting Japanese national
output levels to a common currency, such as the
dollar. Typically this conversion is done using
bilateral exchange rates.

But comparisons of output levels across countries are problematic: They require converting
the national output levels of individual countries
to a common currency, such as the dollar; and
without proper adjustment for the relative purchasing power of different currencies, international output comparisons can be subject to
serious distortions.

However, using the exchange rate to compare
national output levels implicitly assumes that the
exchange rate reflects purchasing power parities
among currencies and that prices in terms of a
common currency are equal everywhere. Thus,
for example, using the yen-dollar exchange rate
to convert Japanese income measured in yen into
dollars presumes that the number of yen required
to buy a dollar on the foreign exchange market
also buys the same amount of goods as a dollar.

This Letter discusses the methodology of making
output comparisons across countries and reviews
the facts concerning U.S. economic growth relative to other large industrial countries during the
postwar period. It shows that, while the relative
economic importance of the u.s. has changed
in the last 40 years, the per capita output level
of the U.S. still remains above that of other
countries. Moreover, U.s. economic growth
throughout the postwar period has been quite
respectable by historical standards, especially
in the 1980s. The narrowing gap between output
levels in other industrial countries and the u.s.
is attributable to a foreign growth surge that
occurred primarily in the 1950s and 1960s.
The methodology of output comparisons

Almost all countries construct national income
and product statistics to measure their national
output and income levels. The accounting methods that underlie these statistics have generally
been standardized throughout the world. National product statistics allow direct comparisons
of output performance over time within a given
country. For example, the national product figures of the United States allow the comparison
of the u.s. output level in 1990 with that in
previous years.
Converting national output levels of different
countries to a common currency to make comparisons among countries is more problematic.
Comparing U.S. and Japanese output levels in,

In fact, this is not generally the case. Even
after adjusting for transportation and other costs,
many goods are priced differently in different
countries. One obvious explanation is that goods
are not identical across countries, so that comparing the prices of those goods can amount
to comparing apples and oranges. In addition,
many goods and services (whose prices are included in a measure of a country's price level)
are not traded across borders. Housing, land, and
services such as haircuts and golf lessons, for
example, are not traded goods. The prices of
these nontraded goods are therefore likely to
differ across countries.
Even for many apparently identical goods,
international prices differ. Big Mac hamburgers,
for example, are made locally in more than 50
countries and look and taste virtually the same
everywhere. Nevertheless, differences in Big Mac
prices can arise because, even though meat may
be internationally traded, the costs of labor and
other inputs used to prepare and serve Big Macs
are not traded. According to the Economist magazi-ne (May 5, 1990) the average price in the
U.s. of a Big Mac in 1990 was about $2.20; in
Germany the price was DM 4.30. Given the prevailing $/DM exchange rate of $.60/DM, this implied a dollar equivalent price of $2.50 for a Big
Mac in Germany, almost20 percent above the
price in the U.S. The corresponding price for
a Big Mac in Tokyo was $2.33.

FRBSF
The exchange rate, then, tends to understate or
overstate the purchasing power of one currency
in terms of another. Therefore, using exchange
rates toconvert a country's gross product to dollars, for example, can overstate or understate that
country's real product. Thus, if the number of yen
required to match the purchasing power of the
dollar over goods is overstated by the yen-dollar
exchange rate, Japan's real income relative to that
of the u.s. is correspondingly overstated as well.
Such distortions are particularly troublesome
in periods when exchange rates are volatile. Yearto-year changes in exchange rates between major currencies of 20 percent or more have been
observed since the early 1970s, particularly since
1985. Because most of these large changes have
been unrelated to price movements of national
outputs, exchange rate conversions necessarily
have at times given erroneous measures of the
relative output levels of countries.

Comparing the comparisons
To overcome these problems in making output
comparisons, Kravis, Heston, and Summers have
constructed relative purchasing power parity
measures of currencies to convert the gross domestic products (GOP) of individual countries to
dollars. (See Kravis, Heston, and Summers 1982;
Summers and Heston 1991.) These price parity
measures are derived from unique price data on
identically specified goods and services in each
country collected through the U.N. International
Comparison Program. Chart 1 presents indexes of
real per capita GOP levels in five large industrial
countries relative to that of the u.s. in 1950,
1973, and 1988 using these data. (Later data
are not available.)
Chart 1
Relative Per Capita Real Output Levels
Purchasing Power Adjusted
(U.S. = 100)

Percent

100

These data indicate that the economic positions
of the U.S. relative to the rest of the world has
indeed changed dramatically in the post-World
War II period. In 1950, Germany's GOP per capita was one-half that of the U.s.; Japan's GDP per
capita was one-sixth of the u.s. Since then, per
capita growth in the rest of the world has considerably narrowed the u.s. lead. In 1988, Germany's real per capita GOP had risen to 84
percent of the U.S. figure; Japan's had risen
to 78 percent.
Chart 2 presents corresponding data on relative
output levels computed using bilateral dollar exchange rates to make output comparisons. These
figures concur in indicating significant foreign
growth abroad relative to the U.S. since 1950.
However, the exchange-rate-converted output
figures generally overstate relative foreign output
performance in the 1970s and 1980s. In 1988, for
example, they indicate that per capita real output
in Japan exceeded that in the u.s. by 20 percent,
and that per capita output in Germany equaled
that in the u.s. The reason is that because of the
sharp appreciation in the yen, OM, and other
major currencies against the dollar after 1985, the
bilateral exchange rates used to make the comparisons overstated the purchasing power of
these currencies relative to the dollar. Thus the
exchange-rate-adjusted output measures exaggerate the growth of foreign output levels in the
last decade. The Kravis-Heston-Summers figures
reported in Chart 1 present the more accurate
picture of relative output levels.

Why is the gap narrowing?
While u.s. per capita output levels still exceed
levels abroad when properly measured, the gap
clearly has narrowed over the last 40 years. Does
this trend indicate that the u.s. is in long-run
economic decline? In fact, much of this narrowing of output gaps reflects a growth surge by the
rest of the world, rather than a major growth
slump in the u.s.

80

60
40

~lJ- ~~i ~~

u.s.

Japan

Germany

11950

France

01973

Italy

1988

UK

20

o

During the periods 1950-1960 and 1960-73
U.s. real GOP growth averaged 3.3 percent and
4 percent a year, respectively. (Real per capita
growth averaged 1.5 percent and 2.7 percent,
respectively.) These figures compare favorably
with u.s. historical experience. It is estimated
that u.s. annual GOP growth was 3.5 and 2.7
percent for the periods 1900-1925 and 19251950, respectively. (Average annual per capita

Chart 2
Relative Per Capita Real Output Levels
EX4:hange Rate Adjusted
(U.S. =

n
U.S.

•

Percent

120
100

~

3.3 percent exceeded that of all other large industrial countries except Japan's 3.6 percent rate.
On a per capita basis, only Japan and the U.K.
have displayed somewhat better performance
than the U.S. during the 1980s.

80

~

Conclusions

60

r-

A long-run view of u.s. economic performance
indicates that u.s. economic growth in the postwar period has been quite respectable by historical standards. While growth in most other
countries surged in the postwar period relative
to the U.s., this surge occurred primarily in the
1950s and 1960s. There is no evidence that the
associated convergence of worldwide growth
rates has been damaging to the United States.
In the 1960s, when foreign economic growth exceeded that in the u.s. by a wide margin, American output grew faster than at any time in U.s.
history. Moreover, in the past decade u.s. growth
performance has been comparable or superior to
that abroad.

r-

40

Japan

I

Germany

• 1950

France

0 1973

•

Italy

20
UK

o

1988

GOP growth was 1.7 percent and 1.6 percent
over the same periods.)
During the 1950s and 1960s the growth of other
industrial economies was exceptionally high. For
example, between 1950 and 1973 Japan's real
GOP grew roughly 9 percent a year. Germany's
GOP grew by 8.4 percent annually between
1950 and 1960 and by 4.4 percent between
1960 and 1973.
There are several explanations for this foreign
growth surge. In part it can be attributed to the
opening of world trade and economic relations
and catch-upgrowth by foreign industrial countries following the devastation of World War II.
A number of researchers have emphasized the
role of competitive forces that have generated a
steady transference of technology from the u.s.
to other countries.
In the period 1973~80, while most industrial
countries experienced a growth slowdown as a
result of oil shocks, growth abroad continued to
exceed that in the U.S. Since 1980, however, u.s.
growth has been comparable or superior to that
abroad. Despite some rebounding from the effects of oil shocks, foreign growth remains far
below rates experienced in the 1950s and 1960s.
In terms of annual GOP growth, the u.s. rate of

This does not imply that current or recent past
rates of U.S. output growth are the highest that
can be achieved. However, it does suggest that
u.S. performance through the 1980s has not displayed any evidence of long-term output growth
slowdown.

Reuven Glick
Research Officer

References
Kravis, Irving, Alan Heston, and Robert Summers.
1982. International Comparisons of Real Gross
Product. Baltimore: Johns Hopkins University Press.
Summers, Robert and Alan Heston. 1991. "The Penn
World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988:' Quarterly Journal
of Economics (May).

Opinions expressed in this newsletter do not necessarily refied the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Judith Goff) or to the author.... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.

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Index to Recent Issues of fRBSf Weekly Letter
DATE

NUMBER

3/29
4/5
4/12
4/19
4/26
5/3
5/10
5/17
5/24
5/31
6/7
6/14
7/5
7/19
7/26
8/16
8/30
9/6

(91-13)
(91-14)
(91-15)
(91-16)
(91-17)
(91-18)
(91-19)
(91-20)
(91-21 )
(91-22)
(91-23)
91-24
91-25
91-26
91-27
91-28
91-29
91-30

9/13
9/20
9/27

91-31
91-32
91-33

TITLE

AUTHOR

Banking and Commerce: The Japanese Case
Kim
Probability of Recession
Huh
Depositor Discipline and Bank Runs
Neuberger
European Monetary Union: Costs and Benefits
Glick
Record Earnings, But...
Zimmerman
The Credit Crunch and The Real Bills Doctrine
Walsh
Changing the $100,000 Deposit Insurance Limit
Levonian/Cheng
Recession and the West
Cromwell
Financial Constraints and Bank Credit
Furlong
Ending Inflation
Judd/Motley
Using Consumption to Forecast Income
Trehan
Free Trade with Mexico?
Moreno
Is the Prime Rate Too High?
Furlong
Consumer Confidence and the Outlook for Consumer Spending Throop
Real Estate Loan Problems in the West
Zimmerman
Sherwood-Call
Aerospace Downturn
Public Preferences and Inflation
Walsh
Bank Branching and Portfolio Diversification
Laderman/Schm idt!
Zimmerman
The Gulf War and the
Economy
Throop
The Negative Effects of Lender Liability
Hermalin
M2 and the Business Cycle
Furlong/Judd

u.s.

The FRBSF Weekly Letter appears on an abbreviated schedule in June, July, August, and December.