It is widely believed that labor productivity and the material standard of living in the southern US trail those of the rest of the country. Analyses support this view (Exhibit 1), though it is hypothesized that eventually the regions within the US will converge.1
But such analyses, based on standard economic data and methodology, fail to take into account varying regional price levels.2 When adjusted for these, the picture looks very different: not only does the gap between standards of living and levels of labor productivity in different US regions shrink, but the order of rank changes. The south, it seems, is better off than either seaboard.
When the output and productivity of different countries are being compared, price-level adjustments, rather than exchange rate conversions, are normally used. Productivity comparisons are based on physical value added (physical output minus material inputs). However, a simple exchange rate conversion of the production figures will not reflect the physical quantity of output in each country. For the number of francs you would pay for a Big Mac in Switzerland, for example, you could have two Big Macs in the US after conversion to dollars, or four Big Macs in China...