Monday, January 07, 2008

The UK is NOT richer than the USA

I see that something is being made of a new statistic that purports to show that Britain is richer than America for the first time in over a century.

Well, as Disraeli might have said there are"lies, damn lies and statistics"

In fact the reality of the difference in wealth between the two countries should reflect the relative purchasing power of the Dollar versus the Pound. There are several ways of measuring the difference in purchasing power, and one of the best is the Economist "Big Mac index". The Big Mac is a standard basket of different goods: bread, meat etc. The price of the hamburger is easily measured and can be compared between different currencies. If one normalises the prices, then we can obtain a crude measure of purchasing power parity.

When we do this between the US and the UK, we find that the Big Mac is 18% more expensive in the UK than in the US, in other words, we could say that Sterling is 18% overvalued versus the Dollar. So, far from British lifestyles exceeding those of America, in fact we could say that we are roughly 18% poorer. So the statistic that GDP per capita in the UK is GBP 23.500, while in the US it is "only" GBP 23,250 is meaningless. If you make the statistic at purchasing power parity, in fact the Americans are indeed still richer. So, while George W. Bush continues to blunder around he has yet to reach that particular nadir... at least so far.


Tristan said...

For quite a lot of goods its easiest to just do a straight comparison £1 = $1 when it comes to spending power I've found.

Anonymous said...

How do things compare if one's diet eschews Big (a wheeze of a description that) Macs in favour of fine fresh food and - particularly important this - copious amounts of red wine, dodgy substances and hard spirits? In other words, would P.J. O' R. be better off here or there?


Surreptitious Evil said...

And that analysis has not taken in to account the tax take. Your Big Mac is bought out of net income, whereas the GDP index (although not related at all to earnings) is closest to gross income.

Therefore my £23500 should really be about £11000 and the Yanks keep a more significant £17400. Which, in addition to the PPP correction gives them the fairly obvious (e.g. why we were all flying to New York to buy Christmas presents rather than the other way around - especially as much of our tax is VAT) advantage in living standards.

Anonymous said...

The Brits pay more tax but worth remembering somes things are free or nearly free in the UK; like healthcare and museums and maybe lots of other things I don't know about ... the more you look into it, the more complicated it gets!

Anonymous said...

When I worked over in the UK I paid the normal rate of 20% but they have VAT on some goods