Newspaper article THE JOURNAL RECORD

Determining Economic Strength Brings Much Soul-Searching

Newspaper article THE JOURNAL RECORD

Determining Economic Strength Brings Much Soul-Searching

Article excerpt

Which country has the strongest economy in the world?

The question has assumed growing importance at a time when economic strength is perceived as the cardinal component in national power and when the industrial world may be dividing into three regions centered on the United States, Japan and a united Germany.

Finding an answer involves complex issues of concept and measurement.

As measured by gross domestic product - the total volume of goods and services produced by a nation, within its borders - the United States still has the largest economy by far.

United States gross domestic product in 1989 was $5.17 trillion, compared with Japan's $2.82 trillion and a united Germany's $1.5 trillion, at current exchange rates between the dollar, the yen and the mark.

But much of the difference is attributed to population size.

With the American population nearly twice as large as Japan's and more than three times Germany's, America's per capita gross domestic product was $20,766 last year, less than Japan's $22,855 but ahead of united Germany's $19,230.

These comparisons are misleading, however, because they are measured at current exchange rates, which have swung widely and are a poor indicator of the real value of money spent in kne's own country.

For instance, Japan is expensive for Americans earning dollars and the United States is cheap for Japanese earning yen.

To correct this distortion, three Uiversity of Pennsylvania economists - Irving Kravis, Robert Summers and Alan Heston - have developed measures of international output and income based not on exchange rates but on so-called purchasing power parities, which are conversion rates that equalize price levels among countries.

The Kravis-Summers-Heston data, prepared for the United Nations International Comparison Project, which compares income and output of various countries, show that Japan's per capita domestic product was only 75 percent as large as that of the United States in 1987, on a purchasing power basis.

Commenting on that large gap, Herbert Stein, a senior fellow at the American Enterprise Institute, says, ``There is already so much paranoia about Japan in the United States that it seems to me important to get this comparison right.''

But measures of economic strength should be dynamic, and Japan has been steadily narrowing the gap with the United States.

From 1980 through 1989, Japan's real gross domestic product, measured in purchasing power parities, grew at an average annual rate of 4. …

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