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  • Chinese Economic Data: More Tall Tales

    The Conference Board, a global research association, made a splash with their 2011 global outlook. The group’s most interesting claims are that emerging markets will drive “global growth” and that China could pass the U.S. on one measure of economic size as early as 2012. The Conference Board is making two mistakes many observers make, and which the media gladly eats up.

    First, the Conference Board projects China could have a larger economy than America when adjusting for purchasing power parity (ppp). PPP is a way to account for different prices across countries. For example, most things are cheaper in China than the U.S., so a dollar’s worth of money, or 6.7 yuan, generally buys more in the PRC than the U.S.

    In that light, the dollar value of China’s GDP should be revised higher in comparison to America’s. For 2009, the World Bank has American GDP near $14.3 trillion and Chinese GDP at $9.1 trillion using ppp, where using normal GDP China was at $4.9 trillion.

    Moreover, China almost always revises GDP higher after the fact and boasts much faster growth than the U.S. It’s not going to pass the U.S. in 2012 but, in current ppp terms, it could get close. Hence the headline.

    Now the part headlines miss: prices change. What a dollar’s worth of money buys in the PRC is slipping. Chinese prices are rising faster than American prices, arguably much faster. The ppp comparison between the U.S. and China’s is going to change, making China’s economy look smaller.

    This has happened before. The last time the World Bank adjusted its ppp measurements, the ostensible size of the Chinese economy fell 40 percent. PPP has advantages but, as you move farther in time from the price measurements that give purchasing power across economies, ppp can tell a very inaccurate story.

    The Conference Board might have adjusted for prices changing over time but they gave no indication of having done so. More important: most commentators will not adjust for changing prices; they will take the current ppp measurement and run. That will in turn generate a lot of false claims that China’s economy is soon to be bigger than America’s.

    The second mistake the Conference Board made is already common: fast-growing economies drive global growth. That seems sensible but it gives fast-growing economies too much credit. Fast-growing economies may be helping everyone but they may be only helping themselves.

    In 2010, China will not add to the rest of the world’s GDP, its trade surplus means it will take almost $200 billion away from the rest of the world’s GDP. This is just a function of how GDP is counted. The PRC does contribute to the world economy in many ways but it is badly misleading to suggest that it is doing the most to help the rest of the world. China is raising the average of GDP growth among countries but doing so in part by continuing to drain GDP from the rest of the world.

    In terms of adding to the rest of the world’s GDP, even though we’re growing slowly, the U.S. remains by far the biggest contributor.

    Posted in International [slideshow_deploy]

    3 Responses to Chinese Economic Data: More Tall Tales

    1. laurie, Hawaii says:

      I am 67 years old and ever since I have been forced unto Medicare as my primary, it has been a nightmare. I hate it. Get rid of Medicare completley to save money. It is a total waste. Most good doctors won't take it anyway. Then you are charged triple if you use it . You actually save money if you pay the dotor cash. SO PLEASE DUMP MEDICARE. Let free enterprise society survive. …..it actually works. My partner has contributed $200,000 into social security in his lifetime…..It was stolen by the government to give it to him "later." Ha, they spent it in their corruption schemes. We are not giving up what we contributed, but let the future save their own and keep it without you thieves micromanaging our every move. PLEASE, GOVERNMENT GET OUT OF OUR PERSONAL LIFE!!! YES, YOU WERE SET UP TO DEFEND OUR COUNTRY, BUT NO YOU ARE USING OUR MONEY FOR CAMPAIGNS AND 'SPECIAL FRIENDS OF YOURS GOLDEN PARACHUTES.". Defend our country, build roads and a few other things. Stick to those Federal items, please.

    2. Tony says:

      Derek, the last ICP in 2005 adjusted downward the size of China's economy by 40 percent, but this was because China had never before participated in the ICP, and the previous prices used were based off a 1985 sample. By 2012, only 7 years will have passed, so there is no way that anything close to a 40 percent revision will be in the works. In fact, the authors of the 2005 ICP admitted that that survey over-estimated China's price level by using only urban prices. So China's GDP by PPP is likely 10-15% larger than reported.

      Contrary to what you're saying here, the PPP basis changes are not due to changes in CPI. They are due to changes in something called the "Penn Effect" or the "Balassa-Samuelson" effect (see Ravallion, 2010). This effect measures not the price level but the price structure. Price level changes are already accounted for by real GDP, discounting for inflation. The 9.6% growth figure from China is already adjusted for CPI. Price structure changes mean that China's PPP advantage WILL disappear but only after its price structure equals that of a FULLY DEVELOPED economy. China's current per capita income is only $6,600 compared to $46,000 in the US, so its price structure is nowhere near the US. Its PPP advantage will persist for some time to come.

    3. Zhuubaajie, Hong Kon says:

      If anything, the PPP is underestimating the size of the economy in China. HOW do you actually compare?

      Start with health care, the obvious one. Doctors make $15K to $25K a year in China. In America it is more like $300K average. Yet the difference in life expectation is not all that great – America has the same life expectancy as Cuba.

      How about Ph.D.'s? R&D costs 1/5 that in the U.S. for comparable disciplines, because the Chinese researchers get paid in RMB sums similar to that in US$ in America.

      How about the euphemistic "corrections industry"? Well we shouldn't really go there. But do think about how each counts towards the GDP in each nation.

      But for the need to import (raw materials and such), in PPP terms China is already the biggest economy in the world.

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