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More on China's GDP and those 'biggest economy in the world' claims

More on China's GDP and those 'biggest economy in the world' claims

I reported on this last week, using the FT's analysis as a starting point. I noted in my piece that, although the passing of the 'biggest economy in the world' baton to China was poignant because the previous such change happened in 1872, the figures needed to be taken with a grain of salt.

But Michael Pettis goes further. He is unimpressed by the way the FT talks about purchasing power parity (PPP) as if it can help determine geopolitical weight:

The concept behind PPP is quite simple. You cannot always compare two countries in a meaningful way by comparing their GDPs at current exchange rates. Prices are different in different countries in ways that current exchange rates do not offset. This means that relative living standards are a function of more than just relative incomes.

This doesn’t mean that comparing the GDP of two countries directly at current exchange rates is useless. For example – and this is a fairly obvious mistake made in the FT article, and indeed in nearly every other article I have seen on the topic – if we are interested in the relative weight of two countries in geopolitical terms you would almost certainly want to compare their GDPs on the basis of current exchange rates. Exchange rates may be volatile, as this article notes, but a direct comparison, unadjusted for price differences, better measures the relative importance of each economy for its trade partners.

There's much more at the link, including the fascinating side note that China itself is against the World Bank's use of the PPP measure, on the alleged grounds that 'leaders do not want exposure to the international pressure that comes with being the world’s largest economy'.

Need further reading on this topic? The Atlantic's James Fallows is just as sceptical as Pettis, and points readers to a discussion over at ChinaFile.


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