People’s
Daily, the Chinese equivalent of an enemy of the people,
cautions the nation not to boast of its economic prowess, lest it be
misunderstood. “This month,” writes Amanda
Erickson of the Washington Post, “a
professor who dared suggest that China’s economy had already surpassed the
United States’ faced a social media backlash of students and alumni suggesting
he should be fired.”
I’m afraid that I have bad news for the Chinese: Their
economy really is the world’s largest and has been for several years. Look at the table below. In 2017, China’s gross
domestic product – the value of what the country produces on its soil – was
23.3 trillion international dollars.
This easily surpassed the United States mark of 19.4 trillion
international dollars. No other nation came close: The third largest economy
was India, with 9.4 trillion international dollars.
The global economy looks nothing like it did in the
postwar days of Allied hegemony. Of the
10 largest economies last year, only five were in the West: the United States,
Japan, Germany, the United Kingdom and France. The rest, including two of the
three largest, were from the Second or Third World. 
Data
source: World Bank
But wait: what are international dollars? I’ll explain. Most comparisons of national
income in the news media convert the GDP of other nations to US dollars by
using current exchange rates. Consider a ridiculous but simple example: if the
GDP in Kazakhstan is 600 tenge, and the exchange rate is 300 tenge per dollar,
then the dollar value of Kazakhstan’s GDP is $2.
One problem with this approach is that the exchange
rate may change for reasons that have nothing to do with the nation’s ability
to produce. For instance, when the
National Bank of Kazakhstan put the tenge on a float in August 2015, the
exchange rate more than doubled in a few months to nearly 400 tenge per
dollar. If you held your wealth as tenge,
your ability to buy goods priced in dollars fell by more than half. Yet Kazakhstan’s ability to produce certainly
didn’t halve: most of the tenge depreciation was just a correction in currency
prices. In early 2016, using the current exchange rate to measure the country’s
economic capacity would have underestimated it grossly, when compared to early 2015.
Were this the only problem with using the exchange
rate to compare the incomes of nations, we could solve it easily by using a
three-year average of the exchange rate, which smooths out fluctuations. That’s
the Atlas method. The World Bank uses it
regularly to measure GDP across nations.
Does
China still go to town?
Unfortunately, life is not that simple. As Keith
Pilbeam points out, prices for nontraded goods and services – like perishable
fruits, apartments and dental work -- are often lower in poor countries than in
rich ones. So a hundred dollars, when converted into tenge, may buy more in
Kazakhstan than they would have bought in the US. Using the market exchange
rate, even when averaged over time, to estimate the dollar value of
Kazakhstan’s economy may underestimate its output.
One solution to this problem is to measure GDP in
output, not in dollars. Suppose that a
hamburger costs $1 in the US and 100 tenge in Kazakhstan. Then we could measure both economies in terms
of the hamburgers that they could produce, by using the exchange rate of 100
tenge per dollar. This exchange rate is
an “international dollar”: The number of tenge (or whatever) that buys the same
amount of goods as a dollar does in the US.
In 2015-2016, although the tenge tanked, using the international dollar
would have given us the right picture: Kazakhstan’s GDP did not shrink as much
as the market exchange rate suggested, because the tenge price of a hamburger
did not rise as quickly as the exchange rate did.
An example may help.
Suppose that US GDP equals $3 and Kazakhstan GDP equals 200 tenge. Using the international dollar, we find that
US GDP equals three hamburgers ($3 divided by $1) and Kazakhstan GDP equals two
hamburgers (200 tenge divided by 100 tenge).
The international dollar enables us to compare output of the two
countries, in terms of burgers.
Of course, the hamburger is just a simple
example. We should calculate the
international dollar by using the price of a basket of common goods. But specifying a common basket for two
nations as different as the US and Kazakhstan can be a bit of a trick. That’s one shortcoming in using the
international dollar to compare national economies. (The approach is also known
as “purchasing power parity.”)
Moving On Department: The economic adviser to US
President Donald Trump, Larry Kudlow, says China’s economy “looks terrible.…[It]
is just heading south. Business investment is just collapsing.”
According to the World Bank’s World Development
Indicators, output in China grew at an average rate of 9.6% per year from 2000
through 2015. It grew even during the global financial crash of 2008-2009. Chinese growth rates peaked at 14.2% in 2007,
when the global economy was as overheated as a Dodge radiator in the Mojave
Desert, and they fell to 6.9% in 2015. Yes,
growth has been slowing for a decade; see the figure below. And the slowdown may
well continue: The International Monetary Fund puts the 2017 rate at 6.9% and
anticipates 6.6% for 2018. But I know of
a lot of countries, including the one that elected Kudlow’s boss, that would
love to have an economic growth rate as terrible as China’s. – Leon Taylor tayloralmaty@gmail.com
Data source:
World Bank
Good
reading
Keith Pilbeam. International finance. Fourth edition.
Palgrave Macmillan. 2013.
References
Associated Press.
The Latest: Kudlow: Chinese economy is ‘terrible.’ Washington Post. August 16,
2018.
Amanda Erickson.
China has a new message for the U.S.: Don’t be alarmed, we’re not that
great. Washington Post. August 16,
2018.
World Bank.
World Development Indicators. worldbank.org
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