Many claim that China will soon overtake the US. This column argues that this claim is based on a misuse of statistics. ICP price data is necessary to compare living standards, since a dollar’s worth of yuan buys more in China than a dollar buys in the US. But the fact that rice and clothes are cheap in rural China does not make the Chinese economy larger. What matters for size in the world economy is how much a yuan can buy on world markets. Using the correct prices, the US remains the world’s largest economic power by a substantial margin.
Jeffrey Frankel, Friday, May 9, 2014
Martin Ravallion, Friday, March 26, 2010
The World Bank’s estimate of China’s real GDP per capita was revised down by 40% in 2005. This column explains how economic growth impacted price structures in developing countries -- impacts that had not been factored into how old PPPs were updated prior to new price surveys. It argues that large revisions could be avoided by using better economic models for predicting PPPs.