Labour Productivity Ratio and International Comparisons of Economic Performance - Formalization of the PPP Theory and Preliminary Examinations

Abstract

International comparisons of living standards and economic performances are still primarily made using GDP per capita, in spite of frequent criticism that this is a partial and ill-founded measure of social welfare and position of a country. In this paper a ratio Q is determined as better describing economic performance of a country. This is labour productivity ratio of the real GDP to disposal employees' income. Together with real GDPE (GDP per employee) parities of these variables determine average value of an exchange rate. The formula of the average value of exchange rate is as follows:

ER [cu/$] = [QA / QC]^2 x [GDPEC (cu) / GDPEA ($)] x [(1 iC) / (1 iA)] x [(1 - dC) / (1 - dA)

where: ER - denotes average value of exchange rate, A - denotes the USA, C - denotes name of a chosen country, cu - denotes name of a currency unit, d - denotes rate of disposability of payroll pay, 1 i - denotes GDP deflator. Ratio Q is theoretically described by special production function formulated with no econometric approach. It appears that Q is a function of six important variables; among others are assets turnover, technical equipment of labour, and relation of pay to employees' capital. Parities of these variables help to enlighten economic position of examined country in respect to other chosen country, for instance the USA. Paper includes a ranking list of a sample of countries arranged in line with labour productivity. Computations are made assuming that data concerning the USA, as well as average values of free market exchange rates are remarkable trustworthy.

Keywords: labour productivity, exchange rate, inflation control

JEL Classification: E5, F31, J 24, P21