News / Economy

Analysts Mixed on Emerging Economies Metric

FILE - Coins, banknotes of Chinese yuan paired with a U.S. dollar during photo illustration, Fuyang, Anhui province, November 2006.
FILE - Coins, banknotes of Chinese yuan paired with a U.S. dollar during photo illustration, Fuyang, Anhui province, November 2006.
Jim Randle
The summary findings of a World Bank study show the economies of India and China have grown more than previously thought, leading some analysts to predict that China could surpass the United States as the world's biggest economy by the end of the year — sooner than many experts had predicted.

Conducted every six years by the World Bank’s International Comparison Program (ICP) under authority of the United Nations Statistical Commission, the results show that, based on 2011 prices, the purchasing power of China’s yuan was significantly stronger than indicated by standard exchange rates.

Drawn from a different economic measurement than the widely-used Gross Domestic Product (GDP) figures, the results of the Purchasing Power Parities (PPP) method purportedly reflect differences in costs of living in different nations with greater accuracy.

According to Kamel Mellahi, Professor of Strategic Management at Britain's Warwick Business School, GDP measurements have inherent problems.

"With traditional GDP, people always said it underestimated the size of economies in developing countries, and some of the emerging economies, because the cost of living is cheaper and lower there," he said

Whereas GDP measures all goods and services produced in a nation and relies on market-based exchange rates — the rate travelers or exporters get at a bank — PPP-based analysis allows comparison of living standards in countries with widely varying prices.

"[It] captures how far a dollar goes in terms of buying goods and services in different countries," said Mellahi, explaining that the PPP metric is particularly good at illustrating the relative cost of goods in different nations and how much it costs to buy things needed by ordinary people.

"You take a basket of goods that we all buy, including milk, butter, sugar, [going] to the movies, prices of haircuts in different countries, and they look at the cost of that in different countries," he said.

Scholars then use that data to work out what amounts to a hypothetical exchange rate with which to compare economies.

Whereas both PPP and GDP rates can be affected by many factors, Chief Financial Analyst Greg McBride says although PPP eliminates some statistical distortion, it produces results more akin to estimates than precise measurements.

"There is a huge margin of error there that I think can really throw the validity of the whole thing into question," said McBride.

For University of New Haven's Dr. Robert Rainish, PPP is not more or less accurate than GDP but only a different lens for viewing economic activity.

"You get a different picture," he said.

Regardless of methodology, various reports indicate China and India have been growing faster than developed economies such as the United States for some time, and the recently released ICP data also show India overtaking Japan as the world's third-largest economy.

The ICP summary findings also show the U.S. economy expanding at a weak one-tenth of one percent in the first three months of this year.

The full results of the ICP report are slated for release in July 2014.

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Comment Sorting
by: Jacob from: India
May 02, 2014 1:07 AM
Wouldn't it be more sensible to say how many cars per person, how many televisions, how much living space per family, how many hospital rooms per person, etc.? These are the real things that indicate the "wealth" of an economy. Talking about GDP and PPP both are much less accurate than what I have just mentioned and actually create more confusion than clarity.
In Response

by: Jonathan huang from: Canada
May 03, 2014 7:27 PM
You should put the number of toilets each family has in your list.

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