Here's another piece on the previous story abt China's economy being smaller PPP wise.
I like how they use the simple example of price of noodles to explain PPP which has been misunderstood by many.
Just thinking, if it's inflation that's causing this revision, such revision should be applicable to almost every countries given how inflation is rearing its head worldwide in recent years.
International Herald Tribune
China shrinks
Sunday, December 9, 2007
Few people noticed, but China got smaller the other day. According to new estimates, the colossal Chinese economy that has been making marketers salivate and giving others an inferiority complex may be roughly 40 percent smaller than previously thought: worth $6 trillion rather than $10 trillion. That means it lost a chunk roughly the size of Japan's output.
What happened was a large statistical glitch. When comparing the size of economies, economists mostly avoid using the standard currency exchange rates seen in bank windows. These fluctuate too much, driven by housing woes, trade deficits or presidential popularity. Economists prefer to use what is known as "purchasing power parity" - or P. P. P. - a rate that adjusts for price differences between countries.
Take a 40 yuan serving of noodles at an eatery in Beijing. If the same dish cost $4 at a comparable restaurant in New York, the noodle P. P. P. would be 10 yuan to the dollar. Calculated using a large basket of goods and services, this ratio allows for a more consistent comparison of economies.
The problem is that the World Bank's measure of China's rate, everybody's benchmark, had been based on a 1980s survey of Chinese prices. This year, the World Bank did its own survey to update the measure. While the bank has not published it yet, Albert Keidel of the Carnegie Endowment for International Peace extrapolated the figure from another set of exchange rates published by the Asian Development Bank.
It turns out that things in China are more expensive. It's as though we discovered that the real price of the noodles in Beijing was 50 yuan, yielding a P. P. P. of 12.5 yuan to the dollar rather than 10.
That means the Chinese are relatively poorer and China's economy is smaller than everybody thought.
This is not a mere technicality. Suddenly the number of Chinese who live below the World Bank's poverty line of a dollar a day jumped from about 100 million to 300 million, roughly the size of the United States population.
And if you thought China's energy consumption was dismally inefficient, consider that it still uses the same amount of energy to produce 40 percent less stuff.
The reassessment does not just involve China. India is also likely to be downsized. And, by the way, global growth has very likely been slower than we thought.
China's leaders should be pretty pleased. China has been known to enjoy throwing its weight around, but being big also exacts a cost. If a country is that wealthy, others can demand that it start pulling its weight and play more by the international rules.
If China is less wealthy, and less a rival, maybe it won't be pressed so hard to revalue its exchange rate.
Using the earlier estimate, China's economy was due to surpass the $13 trillion American economy in about five years. At $6 trillion, it may look somewhat less scary.
International Herald Tribune Copyright © 2007 The International Herald Tribune |
