Why Price Data Are Mostly Wrong

World Economics
19 April 2020

Price data are crucially important.  They are used to measure changes in the cost of living for government pensions and many other services; to assess real economic growth; to make inter-country comparisons of national income; to estimate real value- added by economic sector to estimate productivity, and for many other serious tasks.   
Price data are central to many key functions of economic activity and public policy, but there are very good reasons for believing it’s a near impossible task to produce good price data. 
This paper discusses seven major issues that undermine the reliability of official price indexes.

Distorted International Comparisons of GDP

Is China the largest economy in the world or is the United States? According to the World Bank in 2018 the nominal GDP at current prices of the United States was US$20.544 trillion, 51% larger than China at US$13.608 trillion. However, when measured in Purchasing Power Parity (PPP) terms, (again in 2018 and according to the World Bank) the nominal GDP of China was US$25.399 trillion, 24% larger than the United States at US$20.544 trillion. 

The distortions in measured size and rank by applying different price indexes are not confined to the relative sizes of China and the United States as the Table below shows for the largest five economies.

Source: World Bank

Country GDP comparison require the use of price data. The simplest method is to use the prices of domestic currencies in terms of a standard currency – usually the US$ - based on average exchange rates over a period. But currencies