IMF statistics show that world GDP fell 4.9% from 2014 to 2015 which is almost as severe a drop as occurred from 2008-2009. Check out the bottom rows of Table A1 in the October 2015 issue of the World Economic Outlook, and you find that world GDP fell from $77.2 trillion in 2014 to $73.5 trillion in 2015. Sure, the world economy hasn\’t been booming in the last year or so. But did we really just experience another global recession like it 2009? It seems implausible. So what\’s going on?
There are two plausible explanations, one of which seems to have a little more oomph than the other. Peter A.G. van Bergeijk has argued that some of the explanation is likely to have occurred from inadequacies in the IMF statistical system. As he points out, in a conceptual sense any exports from one country must be imports to another country–so the official statistics gathered by each country should add up in a way that global exports are equal to global imports. However, when the IMF adds up it statistics, it finds that total world exports exceed total world imports by $206 billion. This factor alone isn\’t sufficient to explain a $3.7 trillion drop in global GDP, but it does suggest that there are some problems in the underlying statistics.
The other explanation, courtesy of Maurice Obstfeld, Oya Celasun, Mandy Hemmati, and Gian Maria Milesi-Ferretti, emphasizes that this decline in world GDP from 2014 to 2015 is based on a calculation that converts the GDP of each country into US dollars using market exchange rates. The problem arises because in the first nine months of 2015, the foreign exchange value of the US dollar rose by 13%. When the US dollar becomes \”stronger\” and can buy more of foriegn currencies, it necessarily implies that the currencies of other countries are \”weaker\” and buy fewer US dollars. Thus, a stronger dollar means that when the IMF converts the GDP of other countries into US dollars, those GDPs will look smaller.
But it\’s also true that the process for calculating the PPP exchange rate is a difficult one, full of underlying assumptions. In 2010, recent Nobel laureate Angus Deaton devoted his Presidential Address to the American Economic Association (freely available on-line here) to detailing the \”weak theoretical and empirical foundations\” of such measurements. When the PPP exchange rates are recalculated and readjusted every few years, the changes are often quite large–which confirms that the PPP calculations should be treated as having a substantial margin of error. For purposes of comparing world GDP from one year to the next, the PPP exchange rate is probably more accurate than the market exchange rate–but there\’s no reason to think that the PPP exchange rate is exactly right, either.
Domestically, we typically refer to US output as measured in money terms of US dollars, but a national-level GDP statistic doesn\’t take into account regional differences, like how higher oil prices are a positive for oil-producing regions but not for others, or how housing prices can vary substantially between states and between urban and rural areas. Measurements based on the common yardstick of money is a shortcut that is often useful and productive. But of course, what ultimately matters for people is not value as expressed in money terms, but rather the quantities of goods and services that can be consumed, along with hours worked.