Why you should not blindly trust statistics on per capita GDP based on PPP

Everybody knows that Gross Domestic Product (GDP) should be adjusted for the different level of prices if you want to compare different regions or countries. That is why the GDP based on Purchasing Power Parity (PPP) was created. However, this measure can be quite misleading, and I explain you why.

First of all, price levels are often measured in a bogus way, as I have argued in a previous post. But another fact is even more important, and it is that if a large firm establishes its headquarter in an area that does not have a very large population, its revenues are going to considerably distort the value of the GDP based on PPP. This is especially true if the the given area is not very rich.

Let's consider the map of the GDP of european regions in PPS: [1,2]

You can see there are regions in central-eastern Europe that are apparently wealthier than many western european regions. Is this really the case? Is the Bucarest region wealthier than Finland and large parts of Germany? Not quite.

So how can we get a realistic picture? There are better measures, like the GfK purchasing power index: [3]

Now everything makes much more sense. The eastern european areas that are classified as having a GDP in PPS way above the european average turn out to be relatively poor areas compared to most of western europe, which is what real world experience tells us.

[1] PPS stands for Purchasing Power Standard. Here we can ignore the technicalities about the difference between PPP and PPS. Interested readers can find some details on the eurostat website.

[2] The map on GDP in PPS was taken from here.

[3] The map on GfK Purchasing Power was taken from here.