I once wanted to express my bewilderment on this topic, but I am not an economist, so I refrained myself. After having read the article Want to Understand How China is Doing? Don’t Look at GDP, it all came back to me.
I state that the GDP is by far the most irrelevant and inadequate way of compare different economies, even when defined not in US dollars, but in purchasing power parity (PPP) dollars.
- In USD (2012): China = 8.227 trillion dollars; US = 15.68 trillion dollars.
- In PPP (2012): China = 12.44 trillion dollars; US = 15.89 trillion dollars.
Adjusting for purchasing parity seems to give benefit to China — obviously, one can buy much more with 1 US$ in China than in the US –, but is this enough to show things in their true light? After all, the GDP measures “the market value of all goods and services produced for final sale in an economy”, but how do we adjust for different “market values” of identical products on different markets? Are the exports counted as “final sale”? At which “market value”?
Let’s make up some hypothetical figures. Say both China and the US produce 1 million of ballpoint pens each — in the US, for the internal market, in China, mostly for export. Brand-name ones — let’s say Bic (they’re produced in USA, China, France, Mexico, and more).
- production costs $0.09/pen
- export wholesale price $0.10/pen = “final sale” for 900,000 pcs
- retail price on the internal market $0.20/pen = “final sale” for 100,000 pcs
- addition to GDP: $110,000 ($0.10*900,000 + $0.20*100,000), or about $165,000 PPP-adjusted*.
- freight costs & custom taxes: $0.10/pen
- total costs right after entrance in the US: $0.20/pen
- retail US price: $0.89/pen
- production costs $0.25/pen
- wholesale price $0.30/pen
- retail US price: $0.89/pen = “final sale” for all 1,000,000 pcs
- addition to GDP: $890,000
There is something paradoxical here. In both cases, the same quantity of identical pens are manufactured, yet the contribution to the national GDP is radically different — 5 to 8 times in this hypothetical case, but which seems plausible to me.
Were we really to count the actual productivity, the actual products and services, I’d say China’s economy is much bigger in reality than the sum of the economies of the United States and of the European Union altogether.
And this gives me shivers.
*Of course, the PPP adjustment that transforms 8.227 trillion in 12.44 trillion dollars seems to believe that things are cheaper in China at an average factor of 1.5 — but I really believe that a pen that retails $0.89 in the US could retail $0.20 in China, so maybe we have no reliable means to compare such different economies. China is an export-based economy, so what it makes for export is more important than the internal purchasing power. So I still believe the world doesn’t acknowledge the reality…