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    Different income comparisons

    Fatih Özatay, PhD17 February 2011 - Okunma Sayısı: 961


    'Corrected' income figures calculated on the basis of the prices of goods and services and of the methods also differentiate.

    Comparison of per capita income across countries is a tricky business. Income of a particular country is calculated in terms of that country's domestic currency. Calculated incomes can be stated in terms of a single currency by using the valid exchange rates. However, this does not solve the problem completely for two reasons.

    First, exchange rates are highly volatile. They can change continuously and this change can be quite sharp sometimes. If we rely on volatile interest rates, the changes in income level between two episodes would be overstated. However, one of the main reasons for comparing per capita incomes is to compare the life standards across countries which are not as volatile as exchange rates.

    The second problem is of even greater importance. In poor countries, prices of basic goods and services are in general lower than those in developed countries. A comparison that does not consider this phenomenon therefore overstates the disadvantageous life conditions facing individuals in poor countries when compared to those in developed countries.

    WB data demonstrates a picture in favor of Turkey

    To overcome these problems economists try to calculate the income of countries in a way to reveal the 'purchasing' power implied by a certain level of income. The income derived as a result of this calculation is called 'income at purchasing power parity'. Let me call this the 'corrected income'.

    This is not an easy calculation; only a limited number of institutions carry out this calculation. 'Corrected' income figures calculated on the basis of the prices of goods and services and of the methods also differentiate. I wrote two commentaries on Egypt and Tunisia on February 10th and 15th. The analysis in those commentaries indicated that per capita income in Tunisia was higher than that in Turkey. I argued that this did not make much sense to me.

    The figures I have provided were taken from a dataset frequently referred to in the literature on economics and studied and updated for more than forty years in Pennsylvania University. The dataset is accessible by anyone on the web page http://pwt.econ.upenn.edu/.

    The World Bank (WB) also makes similar calculations. If you use the dataset of the WB, the picture turns in favor of Turkey. What is more, I had stated in my previous commentaries that per capita income in Turkey did not change considerably since 1960s when compared to developing countries. 'Crude' WB data on Turkey can be used as of 1998. My comments are valid for the period after 1998, too. But this is not an issue that can be concluded in one short paragraph. I have to address it in more detail in the next commentary.

    Hakkı Devrim is right, but...

    On columnist Hakkı Devrim's commentary on February, 11: Mr. Devrim criticized my commentary on February 10 in two aspects. First is on the abbreviation CBRT. He warns me that I have to write 'Central Bank of the Republic of Turkey' and the abbreviation first and use the abbreviation alone thereafter. The problem generally stems from the limitation on character count. In some other times I use the abbreviation alone which turned into a bad habit for due to restrictions on character count.

    The second criticism he raises is of higher importance. He is right also in that: He says that 'quantitative tightening' does not sound correct. It is not an excuse, but I want to explain this as follows: in January and February I wrote a number of commentaries on the new policy framework of the Central Bank. In those I have explained at length what quantitative tightening refers to. In my commentary on February 11, I was urging to summarize the tightening phenomena in the context of another subject.

     

    This commentary was published in Radikal daily on 17.02.2011

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