On April 30, data released by the United Nations International Comparison Program showed China's estimated 2011 purchasing power parity (PPP) exchange rate was twenty percent higher than was estimated in 2005. What does this mean? China's economy could become the largest in the world by the end of 2014, unseating the economy of the United States some five years ahead of earlier predictions by the International Monetary Fund. But does that matter? -The Editors
I agree with the group, but would go farther. The International Comparison Program has gone off the rails. It doesn't make sense to compare two countries' PPP-adjusted GDP and say one is larger. Not for any countries at any time.
PPP is intended to better understand personal income. Annual income of $500 in Bangladesh is horrifying low but buys more than $500 in Australia. First, we must compare buying power across all of Bangladesh and Australia, then adjust for vastly different goods and services available-not easy. And it's harder for larger countries. There's an average price between New York and Louisiana we can compare to the average between Shanghai and Tibet? Strains belief.
Unfortunately, there's a bigger problem. PPP is about purchasing power, not economic size. That comparable goods and services are cheaper in Bangladesh than Australia doesn't mean Bangladesh's economy suddenly got much bigger. The claim China will soon be #1 cites GDP, which combines personal and government consumption, investment, and trade. PPP struggles with personal consumption. To apply it to all of GDP is a bridge too far.
An illustration. China has grown faster than the U.S. for decades; what's unclear is the remaining gap. There's a $2 trillion gap in PPP-adjusted GDP in 2011 and a $7 trillion gap in standard GDP in 2013. There's also a $35 trillion gap.
Not a typo. GDP measures what happened in an economy, not how big it is. GDP resets to zero each year. But economies don't reset to zero - the stuff is still there. It's there even if we hide it under a mattress and it's omitted from GDP. The right measure of economic size is national wealth - what we have, not calendar year transactions.
Credit Suisse estimates global private wealth. At mid-2013, it has Chinese private wealth at $22 trillion and American at $72 trillion. Private wealth isn't everything. But you can't pass a country in economic size with $50 trillion less private wealth.
As a check, the Federal Reserve estimates U.S. private wealth at $80 trillion at the end of 2013. Net public debt cuts American wealth to $65-70 trillion. China's government owns a great deal through state enterprises but those firms also owe a great deal. The net wealth of the Chinese state on top of the wealth of the Chinese people is uncertain, but $10 trillion appears generous.
This puts China between $30 and $35 trillion, about $35 trillion behind the US. The gap has not closed in the past three years, as the US emerged from the crisis and Chinese firms borrowed heavily. Plainly, China won't catch up soon. It may not catch up at all.