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  • Mathieu Provencher

China surpasses the USA... in PPP?

Hello Guys! Have you heard that China might be bigger (economically) than the USA already or is going to be later this year? China's GDP in PPP terms is expected to pass the USA's GDP this year, if it has not done so already!!!!

You may hear things like: A new world power; American descent and Chinese ascent; Power has shifted from east to west; Chinese production higher than American one; etc...

These headlines sell well but they are, as most things in these media, nothing else than bogus!

Purchasing Power Parity (PPP) is great when talking about purchasing power (also called real income for those that remember) but it's useless when talking about size. China's GDP in PPP measures all the production in China (quantities) and multiplies that by the prices of these products if they had been produced and sold in the USA... As such the number you get is much higher than the actual market value of the Chinese economy.

Purchasing Power Parity (PPP) rocks when trying to compare the material living standards between countries since products in China are much cheaper than in the USA (most of them at least)... so $10 can buy a lot more in China than in the USA. As such, PPP tries to adjust for that in order to be able to compare the "amount" of stuff a Chinese can buy for the same amount of working hours as an American. The Income per person in China is around 8.5 times lower than in the USA but real income (their ability to purchase things in their own country) is "only" 4.7 times lower.

However, total income (of the whole country) in PPP makes absolutely no sense whatsoever... we are not trying to measure how much stuff individuals can buy in their respective country but rather how much stuff (or more precisely the value of these things) the country has produced, whoever consumes it. Be careful with how things are said in Economics guys, it makes a whole lot of difference! That's partly why I am such a difficult professor, so you guys are forced to think well about what we are talking about... and also I'm just a grumpy old man that enjoys making other people suffer...

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