Monday 18 Jan 2021 | 18:32 | SYDNEY
Monday 18 Jan 2021 | 18:32 | SYDNEY

How China measures up


Mark Thirlwell

1 February 2011 15:09

A few weeks back, Sam referred to the popular guessing game of picking the year in which China's economy will overtake that of the US. But what if it's already happened'

From time to time, The Interpreter has carried items about the best way to measure the size of economies and of national power. One important issue here is whether to compare GDP across countries using market exchange rates (typically converting national currencies to the US dollar using the nominal exchange rate) or using purchasing power parity (PPP). 

My view is that PPP is usually the way to go, although in practice I often try to report both sets of figures. I have also noted that PPP has some drawbacks, including a vulnerability to changes in methodology which can have quite a substantial impact.

For a good example of this, take a look at this post from the Peterson Institute's Arvind Subramanian. He calculates that, measuring GDP on a PPP basis, China overtook the US to become the world's largest economy sometime last year. In other words, according to Subramanian, China is already at the top of the world GDP league table.

According to the IMF's world economic outlook database, however, last year the Chinese economy was probably still less than 70% the size of the US one, and this year Chinese GDP is still forecast to be less than 75% of the US total.

What's going on' Well, Subramanian argues that the PPP numbers used by the IMF are flawed, in large part because they rely on estimates produced by an International Comparison of Prices (ICP) project conducted in 2005. That exercise resulted in very big downward revision for China (and also for India). Interestingly, the 2005 ICP figures were also rejected by the late, great Angus Maddison, who used much higher figures for China. (Maddison's views are here, and a response is here.)

Related: see this post by Michael Pettis.

Photo by Flickr user Sterlic.