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December, 1987, Vol. 110, No. 12
Comparison of purchasing power parity
between the United States and Canada
In August 1987, the Organization for Economic Cooperation and Development (OECD) published results from the 1985 study of multilateral purchasing power parity for its member countries. A purpose of the study was to compare various types of economic data among countries without using market exchange rates to convert the data to a common currency. Because exchange rates do not necessarily reflect the relative purchasing powers of different currencies within countries, the use of exchange rates as a converter for international comparisons could show relationships in price and output levels that did not actually exist. Consequently, a system of purchasing power parities was developed to more accurately reflect the rate at which one currency could be converted to another to purchase equivalent goods and services in both countries. This system not only makes it possible to compare real levels of gross domestic product between countries, rather than nominal levels (which would be obtained if the data were converted using exchange rates), but can also be used to compare real levels of personal and government consumption and gross fixed capital formation, as well as smaller expenditures such as for food, housing, and construction.
The effort to develop a method for comparing real gross domestic product and national accounts aggregates among countries began in the 1950s with studies conducted at the Organization of the European Economic Community (predecessor to OECD) by Irving Kravis and Milton Gilbert. These studies provided the basic approach and the methodology that was then further refined in benchmark studies in 1970, 1973, 1975, and 1980 under the auspices of the United Nations Statistical Agencies, the University of Pennsylvania, the Statistical Office of the European Communities (EUROSTAT), and the OECD. The strategy of these earlier studies (phase I through IV) was to create a system of world-level comparisons by conducting a series of regional comparisons under the auspices of the United Nations regional economic commissions.
This excerpt is from an article published in the December 1987 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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