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China vs US- On the basis of purchasing power parity, China’s economy is bigger

On Wednesday, the International Comparison Program, a statistical project coordinated by the World Bank, announced new data on the size of economies by purchasing power parity that suggests China’s economy is bigger than previously thought.

But the latest news is anything but surprising. Capture d’écran 2014-04-30 à 08.18.55

Regular GDP power rankings are compiled by converting a country’s gross domestic product into U.S. dollars at market exchange rates. The U.S.’s economy in 2012 was valued at over $16 trillion, twice the size of China’s, according to World Bank statistics. It’s by these measures that China’s economy won’t overtake the U.S. for a decade or more.

Some economists say this way of comparing economies is misleading because it doesn’t take fluctuating exchange rates into account. If you believe China’s yuan currency is undervalued, as U.S. Treasury does, then its GDP converted into U.S. dollars is likely to understate the true size of the economy. Likewise, just because a country’s currency devalues by 10% against the dollar, it doesn’t follow its relative economic size shrinks by 10%.

Another way of comparing economies, employed by the ICP, uses a concept called purchasing power parity. PPP exchange rates make adjustments for the differing costs of goods and services across countries. They attempt to show what exchange rates would have to be to buy the same basket of goods in different places.

As costs are much higher in the industrialized world, especially for nontraded goods, comparisons of GDP by PPP exchange rates tend to boost the relative size of poorer nations’ economies. In essence, money goes further in the developing world…

Like all data, though, there are reasons to treat PPP-based calculations with caution. For one, they are a statistical construction, based on complex surveys of baskets of goods in many countries. The IMF points out here the possible statistical errors. And the ICP notes in Wednesday’s release there’s a margin of error either way of 15% when using its data to compare economies of different sizes.

Some economists believe nominal GDP, by using market exchange rates, better measures what a nation’s people or its companies can buy in international markets.

Then, there’s the big issue of the relative populations of an economy. In many ways, it’s no surprise China, with 1.3 billion people, is catching up with the U.S., whose population is about a quarter the size.

“You’d expect countries with more people to have bigger output,” said Stephen Schwartz, a former International Monetary Fund official who now works as an economist for Moody’s Investors Service in Hong Kong. “In per capita terms, China is still very poor.”

Indeed. Ranking the ICP numbers on a per capita basis, China comes in 99th position. India is at No. 127. The U.S. places 12th, a reflection of its much higher productivity and relative wealth.

Chosen excerpts by Job Market Monitor. Read the whole story at China’s Economy Surpassing U.S.? Well, Yes and No – Real Time Economics – WSJ.


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