Is Singapore 105% Richer Than the UK and 52% Richer Than the US? (PPP GDP per capita, Price Indices #1) Transcript

Transcript (PDF)

According to the IMF and the World Bank, Singapore is very rich. So rich that the US and the UK look poor in comparison.

PPP GDP per capita in Singapore is about $87,000. For the US, it’s about $57,000. And for the UK, it’s about $43,000. So, based on these figures, Singapore is 105% richer than the UK. And 52% richer than the US.[1]

In this video, we’ll first explain what PPP GDP per capita is. We’ll then show that Singapore’s riches are greatly-exaggerated.

PPP GDP per capita is a measure for comparing economic well-being across countries.

It is constructed in three steps. Step 1. Calculate GDP. Step 2. Adjust for population to get GDP per capita. Step 3. Adjust for prices to get PPP GDP per capita.

Let’s go through these steps slowly.

Step 1. The 2016 GDPs of the US, Singapore, and the UK were about US$18.6T, US$300B, and US$2.6T. [“Achtung!” “All figures in this video are in US dollars.”][2] What do these numbers mean?

GDP stands for gross domestic product. GDP is the sale value of all goods and services produced in an economy, in a given time period (usually a year).

Here’s a simple example to illustrate.

Imagine that in 2016, the US and Singapore produced only apples and absolutely nothing else. The US produced 18.6 trillion apples and each sold for $1. So 2016 US GDP was simply 18.6 trillion times $1, or $18.6T.

Singapore produced 3 trillion apples and each sold for $0.10. So 2016 Singapore GDP was simply 3 trillion times $0.10, or $300B.[3]

Now, US GDP is about 60 times Singapore’s. So is the average American 60 times as rich as the average Singaporean? Obviously not. US GDP is much larger, because its population is much larger.

For a better comparison of economic well-being, we must adjust for population.

Which brings us to Step 2. Simply take GDP and divide by population, to get GDP per capita. For the US, that’s $18.6T divided by 324 million, or $57,000. For Singapore and the UK, the calculations are similar.

Now, US GDP per capita is 8% greater than Singapore and 42% greater than the UK. So can we say that the US is 8% richer than Singapore and 42% richer than the UK?

Not quite. Imagine again that in 2016, the US and Singapore produced only apples. Each country produced an average of 10,000 apples per person.

Since the two countries are equally productive, we’d like to say that they have equal economic well-being. But if apples cost $1 in the US but only $0.10 in Singapore, then GDP per capita would be $10,000 in the US but only $1,000 in Singapore! Not what we were expecting!

The GDP per capita measure can be misleading, especially when prices are very different. For a better comparison of economic well-being, we must also adjust for prices.

Which brings us to Step 3. By custom, the US is the reference country. [“Very nice!”] Meaning that for the US, no further adjustments need be made — PPP GDP per capita is simply equal to GDP per capita.

According to the IMF, the general price level in the US, as compared to the UK, is about 5% higher. In other words, stuff is generally 5% more expensive in the US than in the UK.[4] So for the UK, we add about 5% to GDP per capita, to get PPP GDP per capita. That’s about $43,000.

Having adjusted for both population and prices, it is now legit to say that, based on PPP GDP per capita, the US, as compared to the UK, is 35% richer.

(Singapore.) Now, is the general price level in the US higher or lower than Singapore? Just for fun, hit pause and make a guess. Be specific: How much higher or lower?

Three consultancies regularly publish global cost-of-living rankings, covering many cities. The priciest US city, according to all three rankings, is always New York or Manhattan. And all three consistently rank Singapore above New York.[5]

Since Singapore is pricier than the priciest US city, the general price level in the US should be lower than in Singapore, right?

Wrong. According to the IMF, the general price level in the US is about 64% higher than in Singapore. [“What!?”] In other words, stuff is generally 64% more expensive in the US than in Singapore.

To be clear, we’re saying that in an imaginary Averagetown, USA, where the price of everything is exactly the US average, stuff is 64% more expensive than in Singapore. If you’ve been to both the US and Singapore recently, you’ll probably find this figure insane.

So! According to the IMF, we must add 64% to Singapore GDP per capita, to get PPP GDP per capita of about $87,000. This is how we arrive at the fantastic conclusion that Singapore is 52% richer than the US and 105% richer than the UK.

(Conclusion.) The IMF assumes the US is 64% more expensive than Singapore. And so Singapore PPP GDP per capita is $87,000.

If we instead make the conservative assumption that the general price level in the US is the same as in Singapore, the figure would be a more believable $53,000. Which would make Singapore slightly poorer than the US.

And if we instead make the more plausible assumption that the US is 20% cheaper than Singapore, then it would be around $42,000, or just below the UK.

Footnotes

[1] Spreadsheet containing figures and calculations. Unless otherwise noted, all figures are the 2016 figures in the Oct 2016 World Economic Outlook (PDF, spreadsheet), published by the IMF. If we use instead the 2015 figures from the same publication, Singapore is 52.2% and 105.8% richer than the US and the UK (rather than 52.0% and 104.8%); and the US is 61.4% more expensive than Singapore (rather than 64.1%).

And if we use instead the World Bank’s World Development Indicators, we are told that for 2015, Singapore’s “Price level ratio of PPP conversion factor (GDP) to market exchange rate” is 0.619. The reciprocal is 1.6144, so this means the US is 61.4% more expensive than Singapore.

The IMF’s PPP conversion factors are simply based on the World Bank’s, so it’s no surprise that the numbers are so similar.

[2] I wanted to explain the following in the video, but didn’t because it would’ve added a couple of minutes.

I use the 2016 exchange rates implied by the World Economic Outlook (Oct 2016): US$1 ≈ S$1.36 and £1 ≈ US$1.37, which are not too different from the actual 2016 average exchange rates (US$1 ≈ S$1.38 and £1 ≈ US$1.35, according to Oanda).

But actually, in the context of this video, where our concern is PPP GDP per capita, the exact exchange rates we use don’t matter. The reason is that they are used twice. Example: 2016 UK GDP is £1,932.476B. This is converted to US$2,649.893B, as reported here. (This is the first time we use the exchange rate.)

Step 2 divides this UK GDP by UK population (65.572M) to get GDP per capita of US$40,411.714.

The IMF asserts that the US is about 5.202% more expensive than the UK. This assertion already takes into account exchange rates. Specifically a basket of goods that in Averageshire, UK costs US$100 (or £72.927— this is the second time we use the exchange rate) should in Averagetown, USA cost US$105.202.

Step 3 then adds 5.202% to UK GDP per capita to get PPP GDP per capita of $42,513.927.

[3] This example is ridiculously simple. In the real world, calculating GDP is far more complicated. One obvious reason is that there is more than one good. But there are many other reasons too.

Also, GDP is a flawed and incomplete measure of economic well-being. For example, GDP neglects inequality, pollution, externalities, leisure time, housework, quality of goods, and much more.

But these are issues for a future video, because the focus of this video is not GDP per se, but rather PPP.

[4] I am glossing over a lot here. Constructing price indices is a lot more difficult than my rapid hand-waving here might suggest. My next video will cover a few such difficulties.

[5] Economist Intelligence Unit: Singapore #1, New York #7 (Los Angeles is the next-highest ranked US city, at #8). The Economist fixes New York as having a Worldwide Cost-of-Living index of 100; Singapore’s index is 116. “Singapore retains its title as the world’s most expensive city for a third year in a row, but its lead over the next two cities in the ranking has nearly evaporated.”

Mercer: Singapore #4, New York #11 (San Francisco #26).

ECA International: Singapore #16, Manhattan #24 (Honolulu #29, New York #34).

Note that these rankings were constructed with expats in mind. So it is entirely possible that despite what these rankings say, for locals, New York is more expensive than Singapore. But even if that be the case, there’s no frigging way Averagetown, USA is 64% more expensive than Singapore.

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