It’s expensive, but we’re rich!

Remember this debate about the relative living standards of Sweden and Alabama? One little commented result of the euro, krona and pound?s rise against the US dollar over the last two years is that measured in current exchange rates European countries? income per head now compares rather more favourably against the United States.

In 2004 the IMF expects US per capita GDP to be just under $39,000. Using current exchange rates, it forecasts French and Germany GDP per capita to be around $33,000, or about 85% of the US level. But the biggest change has been in Sweden, where the krona?s appreciation from nearly 11 to the dollar to just over 7 has brought its GDP per capita to around $39,000 too ? the same as the US ? and of course considerably higher than Alabama. (Figures from the IMF and own calculations).

Of course as hundreds of commenters are sure to point out you really need PPP exchange rates (excel file) as the flip-side of the stronger krona is that prices will be considerably higher in Sweden than in the US, thus market exchange rates, particularly at these high levels, don?t very accurately measure living standards. But then again neither does GDP per head, the point many made at the time of the Alabama comparision.

8 thoughts on “It’s expensive, but we’re rich!

  1. I think you do highlight, Mathew, the problem with these kind of comparisons.

    I spent years watching American movies trying to see the extra productivity in all those car park attendants, and diner waitresses who seem to populate a large part of the US labour market: at least if Hollywood is any guide.

    Or looking to see the extra wealth in the home interiors. Frankly it’s difficult to find.

    I’m sure the US is better off, but not by what a market exchange rate calculation tells us. Nor do I feel that Europe is suddenly richer. Less competitive for sure.

    This rise would be great, if I could see some economic rationale to justify it. I can’t.

    Simply there is a structural flaw in the international currency system, associated with the idea of having a reserve currency. This is now coming home to roost.

    Meantime also the GDP per head calculations for India and China suffer the same sort of problem, but in the opposite direction. They are better off than they seem. By how much? No one realistically knows.

    What we do have is the novelty that workers in these countries, with these values placed on their time are now confronting US and European workers head on.

    Anecdotal detail of the day. One of my ‘sources’ in China just came in over the messenger to tell me he’d left his job. He has had a ‘new’ idea. He is going to set up a company to do outsourcing, since he tells me university graduates in China will work for him for 150 dollars a month.

    If the US is an enormous machine for creating companies, just think what a gigantic machine China will be. We Europeans don’t seem to like to create companies, we seem to prefer to work for them. But the Chinese. Find me the Chinese person who doesn’t want their own business. Culture is important here.

    Meantime the Indians are really getting nervous at all the fuss which is being generated:

    http://timesofindia.indiatimes.com/articleshow/msid-506938,curpg-2.cms

    Anyway Europe. Feel rich while you can. I fear it may not last.

  2. Brad,

    Well if (as it was in 1999) Tennessee still has a SDP about 92% of the US average, and E.Tennessee is the same I would say that Sweden is about 6-7% richer.

    But averages can conceal a lot. I’m pretty sure Law professors earn more in E.Tennessee than Sweden.

    Matt

  3. Well you’re probably right Edward, but enjoy it while we can I say. I’m off to the US on holiday and I recommend everyone else does the same (that should get the deficit down, and the euro with it!).

  4. The really interesting comparisons would be medians rather than means. I suspect you’d be feeling even richer if you compared the average Joe vs the average Jorge.

  5. Well if (as it was in 1999) Tennessee still has a SDP about 92% of the US average, and E.Tennessee is the same I would say that Sweden is about 6-7% richer.

    Eastern Tennesse, meaning the middle ofAppalachia, a chronically poor region in the U.S.

    This Map might be revealing for those interested.

    Matt, your guesstimates seem to be rather off-base.

  6. I’d assumed Brad was making a dig at Instapundit, but perhaps he was saying it because E.Tennessee is very poor? Anyway very interesting, Patrick.

    MSW indeed, though median income estimates are hard to come by.

    One study in 1997 said only Belgium, Denmark and Luxembourg had a higher median income than the US, with Sweden actually very low (something like 75%). However this was based on very different mean income calculations.

    In terms of the bottom decile, the US was the second lowest at 32% of US median income. The UK, to it’s shame, was the lowest at 30% of US median income. The poorest 10% in Sweden had 52% of US median income, France 56% and Norway 60% of US median income.

  7. Obviously PPP does a much better job than nominal exchange rates, even though it is hard to measure. Observe also that PPP’s differ across the USA. A dollar buys much less in New York than in most other locations. BLS used to keep track of this, now http://www.accra.org seems to have taken over that business.

    However, when it comes to changes in PPP over shorter periods of times, like a year or so, nominal exchange rates is responsible for the lion’s share, as inflation rates today use to be low and stable. The krona strengthening is probably in itself a bad thing for Swedish households as it takes a while for cheaper import prices to reach consumers, but labour market weakness may be felt more immediately.

    Does it really help that prices of huge thirsty USA-cars are lowered when your job security vanish?

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