BUS614: International Finance

Multiple data sources are employed to construct world GDP growth at annual and quarterly frequencies over a long period. The annual GDP series covers 180 countries –  36 advanced economies and 144 EMDEs – over the period 1950-2019, though the country sample size varies by year.  The quarterly series covers 106 countries over the period 1960:1-2019:3.  Appendix 1 presents the list of countries used to compute global growth. In addition to data on GDP growth, a wide range of measures of global economic and financial activity are employed.  Indicators of economic activity include trade, industrial production, unemployment, and oil consumption. Financial variables include capital flows, credit, equity and house prices, inflation, short-term nominal and real interest rates, and an index of broad financial conditions. In light of their roles in determining activity, some additional series, such as indicators of uncertainty and confidence, are also examined. Appendix 2 includes a summary of all variables in the database with their definitions, coverage, and sources. 

Appendix 1. List of countries in the database

The main measure of the global business cycle is the growth rate of world real GDP per capita.  Real GDP per capita is considered as a primary measure of average economic well-being since it takes into account differences in population growth. The difference between per capita GDP growth rates in advanced economies and EMDEs is generally smaller than the difference between their aggregate GDP growth rates.  

The growth rate of world real GDP is a weighted average of national real GDP growth rates. Two types of weights are employed: market exchange rate weights and purchasingpower-parity (PPP) weights. The baseline results refer to market exchange rate weights, which are calculated as national GDP measured in domestic currencies, converted into U.S. dollar terms using market exchange rates, as a share of world GDP in U.S. dollar terms. Global trade and transactions in financial markets are conducted at market exchange rates, and the baseline specification uses this weighting scheme. 

PPP exchange rates are calculated as the rates at which the currency of one country would have to be converted into another to equalize the values of a common and broadly defined basket of goods and services. PPP exchange rates differ from market exchange rates particularly because goods and services that are not traded internationally tend to be cheaper in lower-income countries than in higher-income countries. As a result, the value of output in lower-income countries tends to be relatively greater using PPP than using market exchange rates. Thus, PPP weights, which are calculated as national GDP valued at PPP as a share of world GDP, tend to be higher for lower-income countries than market exchange rate weights. As growth in lower-income countries tends to be greater than that in higher-income countries, global GDP growth is often higher with PPP weights than with market weights.  

For measuring living standards and aggregating welfare, PPP weights are more appropriate since they capture the amount of consumption affordable to households for comparable consumption baskets. While PPP weights capture the fact that some goods are cheaper in lower income countries, market rates capture how much an economy could "buy" in global markets. Hence, market exchange rate-based weights are used here to provide the baseline measure of economic size.