Does purchasing power parity need to be considered when calculating GNI? - ERDAL TANAS KARAGÖL

Does purchasing power parity need to be considered when calculating GNI?

The World Bank classifies countries by their gross national income (GNI) per capita on July 1 of each year. The per capita income used in the classification of countries is obtained by dividing the GDP of the countries by the population. Therefore, per capita income may vary according to the rate of economic growth, inflation, forex, and population.

The World Bank classifies countries into three income groups: low-income, middle-income and high-income countries. Since the per capita income band used for the middle income group among these income groups is very wide, middle income group countries are divided into two subgroups as lower middle income countries and upper middle income countries.


WORLD BANK'S INCOME THRESHOLDS

According to the new data announced by the World Bank on July 1, 2022, countries with a per capita income of less than $1,085 are classified as low-income countries, countries with a per capita income of $1,086-13,205 are classified as middle-income countries, and countries with a per capita income of more than $13,205 are classified as high-income countries. .

However, since the per capita income threshold used for middle-income countries ($1,086-13,205) is very wide, this income group is also divided into two. Countries with a per capita income of between $1,086 and $4,255 are classified as lower middle income countries, while countries with a per capita income of $4,256 to $13,205 are classified as upper middle income countries.

These income thresholds used by the World Bank in country classification are updated with the Special Drawing Rights (SDR) deflator used by the IMF. This update describes annual classification thresholds.


HAVE COUNTRY CLASSIFICATIONS CHANGED IN 2021?

According to the calculations for 2021, we can note that while some countries rose to a higher income group due to the increase in per capita income, other countries with a falling per capita income fell into a lower group.

While Panama and Romania are in the upper middle-income group, these two countries are in the group of high-income countries because their per capita income exceeds $13,205. Belize has moved from the lower middle income group to the upper middle income group, as its per capita income exceeds $4,255.

Meanwhile, due to the falling GDP and the exchange rate in the country, Lebanon fell from the upper middle income group, where it has been for nearly 25 years, to the lower middle income group.

According to the World Bank's July 2021 data, Turkey is one of the countries whose rank has not changed in the upper middle income group with a per capita income of $ 9,539.



PER CAPITA OR PURCHASING POWER PARITY?

There are serious discrepancies between the per capita income and purchasing power parity calculations used in the classification of countries. In the calculation of per capita income of the countries, the GDP of the countries is divided by the population to arrive at the per capita income.

However, this method of calculation has been widely criticized because countries’ purchasing power and a host of other important issues are neglected.

Namely, while the per capita income of Turkey in 2021 was $9,539, the per capita income calculated according to purchasing power parity stands at $30,472.

Therefore, due to the high per capita income discrepancy between the two methods, it is clear just how important it is to pay more attention to the data used when calculating the income per capita classifications.







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