Monday 27 June 2016 11:20 am

EU referendum: Depending on your calculations, the UK economy could be smaller than France’s

By: Jake Cordell

The UK economy isn't looking in too fine a shape right about now, with the financial markets reeling in the aftermath of the vote to Leave the European Union.

One notion that seems to have gained a bit of traction is that the UK's economy is no longer the world's fifth largest, having been overtaken by France following the the sharp drop in the value of the pound.

Trouble is, whether it's true or not keeps changing.

The idea makes sense – the UK and France are similar size economies, the fifth and sixth largest in the world – because the pound was whacked overnight, it seems logical that the UK economy would now be worth less than the French.

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In 2015, the UK economy, measured in gross domestic product (GDP), was £1,787bn in local prices.

France's was worth €2,181bn in local prices.

Obviously, when you come to compare the two, you need to use a common currency. That could mean converting the UK's from sterling to euros. In doing so, the pound would need to be worth less than €1.21 for the UK to be smaller than the French economy. 

This is the calculation:

• €2,181 (French economy) divided by £1,787 (UK economy) equals a factor of 1.21.

But, on no single day in 2015 was the pound anywhere near that low. At its weakest point, the very first day of the year, sterling was worth €1.27.

However, between 6.20am and 6.35am on Friday morning, sterling was trading at less than €1.21, meaning for 15 minutes the economy – using nominal spot exchange rates – was smaller than France's.

Over the week, sterling then stabilised at more than €1.23 after that turmoil, meaning it was, once again, larger than France's economy.

But, fresh currency volatility this morning has knocked the UK down to sixth place once again. The same is true when you convert the size of the economy into the global benchmark – the US dollar – though the exchange rates are hovering around levels that mean the fact keeps changing between being true and false.

This morning the exchange rates were:

• £1 equals $1.3210

• €1 equals $1.1017

• £1 equals €1.1981

That leaves the UK economy worth $2,352bn, 2.1 per cent smaller than the French economy on $2,403bn.

The league table

However, this is before we even get to the fact that GDP is rarely measured in local currencies on any one day's exchange rate.

Economists generally prefer to use purchasing power parity (PPP), which adjusts exchange rates to make comparisons between two countries based on their purchasing power. That is calculated by comparing how much it costs to buy a basket of goods in one country with the same costs of buying that basket of goods in another. It was designed specifically to rule out making comparisons of things like GDP based on market exchange rates.

On PPP rates the UK hasn't been the fifth largest for a while anyway. On that ranking we sit in ninth place – ahead of France, but slipping behind India, Russia, Brazil and Indonesia.