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Time varying discount rates
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Discount Rate Set Too High
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Angus Hanton, World Economics, September 2012
The size of government liabilities is only now becoming apparent, but the choice of discount rate is crucial in estimating these. Historically this has been set using Green Book methods and FRS17 accounting standards, but now government is moving to using a rate based on hoped-for economic growth of 3% plus inflation. The more prudent rate to use would be the much lower gilt rate of under 1% – the government’s long-term index-linked cost of borrowing. Use of the 1% rate would show liabilities more than £2 trillion higher, and these will increase as the effects of using the higher discount rate ‘unwind’. Furthermore, the overoptimism from using a high discount rate can lead to poor policy decisions in pensions, government spending and strategic planning.
Maddison and Wu: ‘Measuring China’s Economic Performance’
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Yuri Dikhanov & Eric V. Swanson, World Economics, March 2010
Angus Maddison and Harry Wu (2008) claim that, in 2003, China’s GDP was 73% of that of the United States on a purchasing power parity (PPP) basis. Rejecting the results of the 2005 International Comparison Program (ICP), they construct their own PPP using a 1986 GDP estimate for China (Ren & Chen 1995) which they adjust upwards, and then extrapolate to 2003 using their revised growth rates for China, which they adjust downwards. This note examines the validity of their adjustments and assumptions, and finds them to be inconsistent with recommendations both from the perspective of index number theory and recommended national accounting practices. The 2005 PPP estimates from the ICP, which Maddison and Wu reject, produce a more plausible estimate of the size of China’s economy relative to that of the US (43% in 2005).
International Comparisons of GDP
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Elio Lancieri, World Economics, September 2008
The recent publication by the World Bank of PPP-GDP estimates for 2005, referred to 146 countries, seems a good occasion to reopen the long-standing debate on the use of Purchasing Power Parities. While theoretical speculations on the subject have continued, no estimates were supplied for more than a decade. The author’s alternative method for GDP estimation is based on inflationadjusted long-term exchange rates, where real GDP estimates are obtained through simultaneous equations. He describes the method in the light of his experience and compares its results for 100 countries with both ICP estimates and GDPs at exchange rates.
Measuring China’s Economic Performance
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Andreas (Andy) Jobst & Harry X. Wu, World Economics, June 2008
China is the world’s fastest growing economy and is also the second largest. However, the official estimates of the Chinese National Bureau of Statistics exaggerate GDP growth and need adjustment to conform to international norms as set out in the 1993 System of National Accounts (SNA). This paper presents and discusses the necessary adjustments. The two major contributions are new volume indices for the industrial sector and for "non-material" services. Finally, in order to measure the level of Chinese GDP in internationally comparable terms, the authors use a measure of purchasing power parity (PPP) instead of the exchange rate.

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