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  • Global GDP: U.S. Adds, China Subtracts

    China’s 2012 official economic numbers are due out at the end of this week and I, among others, will gently suggest that they aren’t particularly accurate. Sometimes, however, it isn’t Beijing that can’t get basic economic facts right. Sometimes it’s us. A lot of foreigners believe China is contributing a great deal to global economic growth, but it’s not clear whether they know what they’re saying.

    The obvious read is that China is growing faster than most countries, so it pulls average global growth up. And it’s the second-largest economy, so it pulls up a weighted average even more.

    The key is the idea of “contribution.” This sounds like China is helping the rest of the world grow faster. In fact, if we are talking about gross domestic product (GDP), China is only helping itself grow faster. It’s reducing everyone else’s GDP.

    A trade surplus adds to GDP and a trade deficit subtracts. China again ran the world’s largest merchandise trade surplus last year, at $230 billion, up 48 percent.

    This means that trade of goods with the rest of the world added $230 billion to China’s GDP. It also means that, for the rest of the world, goods traded with China subtracted $230 billion from GDP.

    There’s no argument here; it’s simple arithmetic. China didn’t contribute at all to the rest of the world’s GDP growth. It actually reduced the rest of the world’s GDP growth, and by a larger amount than any other country. That’s a strange notion of economic leadership.

    The U.S., meanwhile, will run a goods trade deficit in excess of $700 billion in 2012. Some people worry about that. Whether you worry or not, it means the U.S. contributed by far the most to the rest of the world’s GDP, as it has for decades. (The import and export of services will cut the American contribution to the world and may reduce China’s subtraction from the rest of the world, but it won’t change who does what.)

    A good observation here is that GDP is a poor measure of prosperity. GDP accounting treats all imports as hurting countries, even though hundreds of millions of people around the world want to buy imports and are made better off by doing so. GDP accounting also treats all government borrowing as good, no matter what the money is used for.

    GDP certainly understates China’s economic contribution to the world, as well as being misleading in more important ways. But usually people talking about growth are talking about GDP, even if they probably shouldn’t. Don’t blame China for this, but when you hear that China is contributing the most to global growth, be very skeptical.

    Posted in Economics [slideshow_deploy]

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