The new World Bank study and China
For some years now, China has been said to possess the world’s second largest economy, at least by some measures. (Japan is number two on an exchange rate GDP basis.) Back in 2004, China’s GDP was estimated at $6.5 trillion by the CIA. That was the number using a measure called Purchasing Power Parity (PPP), a methodology whose limitations we noted at the time.
Yesterday the World Bank released a report on 2005. The new PPP GDP results showed China with a $5.6 trillion economy, including Hong Kong. The traditional exchange rate method tallied China at around $2.4 trillion. The US economy at the time was $12.4 trillion.
News reports and commentary often greeted the new findings by highlighting that they were “40% lower” than previous World Bank estimates of China’s PPP GDP — but China had never participated in any previous surveys, so the World Bank was really not making an apples to apples comparison. (We saw the headline of this report a month ago, and thought that it might be a bigger deal than it now appears.)
Measuring GDP in PPP has its merits in estimating something about the standards of living in a country, since a number of transactions of rural or farming life, among other things, are priced into the calculations, even though there might not be a readily available dollar exchange rate equivalent. But such measures have many shortcomings, for they are estimates piled on estimates. Here is an excerpt of the methodology used in the study regarding China, for example:
It is difficult to get much more than a general picture of an economy using PPP, in our opinion. And it is a bit unfair to say that China’s GDP is “40% lower” than a previous estimate by the World Bank, when China was not even a participant in the previous study. As our readers know, we have plenty of problems with China’s national account estimates and other measures, but this World Bank report is not one of them.