Measuring the Global Economy

Silly question: How big is the world economy? This is a relatively important question for economic developers to contemplate, given the global competition and market share issues they face in their work. How otherwise does Ohio or another state know what it's global market share is in an industry sector like manufacturing

So, how does one measure the "global economy?" Simply to add up the size of all the world's national economies would seem to be the obvious way to answer it, but how that is done yields radically different results, and therein lies a tale. The most commonly used method is to convert national economic outputs to a single measure, namely the American dollar, using the market exchange rates of all the national currencies. That produces a figure of $36 trillion for 2003.

But many economists think that it makes much more sense to use what they call purchasing-power parities (PPP), which take account of differences in prices of the same goods between countries, and so tries to measure the real purchasing power of inhabitants in each country, no matter what the world's fluctuating currency markets happen to be doing to exchange rates. Using this method, the world economy last year was worth $50 trillion.

The precise size of the world economy may not matter much from a policy point of view, though a $14 trillion difference is hardly small change. However, which method of measurement is used also affects more important matters: the global rate of growth, the relative size of economies, and the extent of inequality between rich and poor. In these cases, using market exchange rates can produce misleading results and hence stimulate bad policies.

This is an important question for economic developers to give some attention to. Your thoughts?

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