Geary-Khamis Purchasing Power Parity: A Peculiar Case of the New Banana Republics

Purchasing power parity is a widely used measure to compare national GDPs. However, while this measure works well for countries which are at the same level of economic development, PPP is grossly inadequate when comparing developing and developed nations. The best example to demonstrate this is the case of the former Eastern Bloc. As a result of trade liberalization in the nineties, the economies of the Eastern Bloc countries have undergone massive deindustrialization and transformation into primitive raw materials extraction or final assembly from imported components. However, international institutions such as World Bank and International Monetary Fund provide purchasing-power parity estimates of GDP according to which the economies of these countries are on par or sometime exceeding on a per-capita basis those of the developed world. This paper explains, using simple examples, what stands behind GDP at purchasing power parity, and how, using real-world example of Japan and Russia, “on the back of an envelope,” to estimate and compare the GDP based on a minimum set of publicly available data. It is shown that the well-developed infrastructure, including housing, communications, health care, education, and energy, inherited by the former planned economies, plays a crucial role in their high GDP rankings. Given this infrastructure, income from the export of raw materials is sufficient to cover the basic needs of the population for food and the means of its production, as well as essential consumer staples, and thus to create the illusion of relative well-being.