U.K.’s Living Standards Will Still Lag Behind the U.S.
New Study by Oxford Economics Relies on Flawed Methodology to Claim U.K. is Overtaking U.S.
For Immediate Release: January 11, 2008
Contact: Alan Barber, 202-293-5380 x115
Washington DC -- A new forecast by Oxford Economics suggesting that this year the United Kingdom's living standards will exceed those of the U.S. is misleading, according to an analysis by the Center for Economic and Policy Research (CEPR). The CEPR issue brief, "'Misunderestimating' Living Standards," notes that the forecast relies on a basic misunderstanding of standard methods of comparing international standards of living. Using the appropriate economic method, in 2008, the GDP per capita of the United States will exceed that of the United Kingdom by almost 19 percent.
"The Oxford Economics report incorrectly uses market exchange rates to compare standards of living," said John Schmitt, Senior Economist with CEPR. "They would be hard pressed to find another economist who would back up their methodology."
Oxford Economics incorrectly used market exchange rates, which ignore differences in national prices, instead of "purchasing power parity" exchange rates, which properly take into account differences in national prices. This methodological error is the only reason that the Oxford Economics report can conclude that GDP per capita in the United Kingdom is on target to surpass GDP per capita in the United States this year.
As CEPR notes, this would be equivalent to suggesting that a worker is better off taking a $55,000 per year job in New York City rather than a $50,000 per year job in Ottumwa, Iowa. While the "market exchange rate" for New York City dollars to Ottumwa dollars is one to one, prices are of course much different and generally much higher in New York City. .
The Center for Economic and Policy Research is an independent, nonpartisan think tank that promotes democratic debate on the most important economic and social issues affecting people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.