March 07, 2012

Economist Arvind Subramanian Calculates that China's PPP GDP is 70% Higher than World Bank Estimates

More than a year ago, Arvind argued that China’s GDP in purchasing power parity (PPP) dollars had overtaken that of the United States in 2010.

* Based on the work of Angus Deaton and Alan Heston, Arvind argued that the International Monetary Fund’s GDP estimate for China for 2005 was understated by 27 percent. In fact, I used for 2005 the number in the Penn World Table (series China, version 2 in PWT 7; available online since June 2011).

* And between 2005 and 2010, the International Monetary Fund (IMF) had overstated the increase in the relevant PPP prices in China, and hence understated the increase in GDP between these dates by 20 percent. Conceptually, the “mistake” that the IMF made (and continues to make) is to project these PPP prices based on the evolution of the macroeconomic real exchange rate (changes in a country’s nominal exchange rate vis-à-vis the dollar deflated by changes in aggregate prices between that country and the US dollar). But the computation of the relevant price index for the PPP calculations requires the evolution in the internal real exchange rate, measured as the change in domestic prices of tradable goods to non-tradable goods

Combining these two factors, China's GDP (in PPP dollars) estimate for 2010 for China was greater than that of the IMF by 47 percent.

A new paper, Who Shrunk China? Puzzles in the Measurement of Real GDP by Robert C. Feenstra, Hong Ma, J. Peter Neary, D.S. Prasada Rao argue that IMF’s estimate of China’s GDP for 2005 was 50% too low. (37 pages)

Their analysis is important, not just because it is carefully done, but also because Professor Feenstra will be leading the effort to produce the next generation of the Penn World Table GDP (PPP-based) estimates.

If they are right, and if I therefore might have underestimated China’s 2010 GDP (PPP dollars) by about 20 to 23 percent, three conclusions follow.

This implies China’s 2010 GDP PPP exceeded \$17 trillion and in 2012 will reach \$20 trillion.

The Washington Post has coverage

Living standards in the United States, as measured by per capita incomes, remain much higher than in China under any of the GDP estimates. Remember that all of China’s production and income are spread over 1.34 billion people while U.S. GDP is divided among 309 million Americans. Using the official World Bank figures, U.S. per capita income totaled \$47,153 in 2010, compared with China’s \$7,599. Assuming a Chinese GDP of \$17 trillion raises per capita income to about \$12,700; that’s roughly a fourth of the U.S. level.

By the end of 2012, China would have PPP GDP per capita of about \$14,800. This would be beyond the level of the middle income trap.

Credit Suisse has surveyed and determined that China has a 30% shadow economy. This is an underground economy of bribes and other hidden money.

The \$14800 per capita PPP GDP level would be at the level of Turkey.
Including the shadow economy China per capita income could be at the level of Chile.

Wikipedia list of PPP by country