Facebook Twitter LinkedIn

Each year I have done a post discussing the issue of when China will have the world’s largest economy. Lester Thurow says it won’t be until the 22nd century; I say it may have already happened.

Just to be clear, there is no “fact of the matter,” just as there is no fact of the matter as to whether China or the US is larger in terms of square miles. It’s what my students would call “merely a matter of opinion.” But let’s see if I can persuade some of my peers that China has the world’s largest economy in 2012. Here’s some estimates for 2012 that I found in The Economist:

Country GDP PPP GDP

US $15,604bn $15,604bn

China $8,130bn $12,327bn

Hong Kong $262bn $373bn

Taiwan $518bn $1,007bn

Hong Kong and Taiwan figures are not included because I think they are “really part of China” (although Hong Kong really is part of China.) Instead, I’m puzzled by the PPP conversions of the three countries. Notice that the PPP GDP for China and Hong Kong are each about 50% larger than the nominal figures at current exchange rates, whereas for Taiwan the PPP figure is roughly double the nominal figure. I’ve never been to Taiwan, but I have trouble imagining how this could be correct.

Taiwan is a very rich country, with a per capita GDP (PPP) roughly half way between Japan and the US. How can their cost of living be much lower than that of China? A very nice haircut in Beijing cost me $2.25 in 2009. You can ride in a taxi for 15 minutes for $3. Restaurant meals are very cheap. Grocery store prices are quite low. A first class high speed rail ticket from Beijing to Tianjin (325 mph) is $10. Since wages are only a small fraction of US wages, lots of services are dirt cheap by US standards. It’s possible that the cost of living is far lower in wealthy Taiwan, as the Economist magazine claims, but I find it implausible. I am sure some of my readers travel to both places, so I’d be interested in your thoughts.

A few years ago the World Bank estimated the Chinese cost of living to be only 1/3 of US levels. Then they re-did the computation and found the ratio was 1/2. Even at that ratio China would have a larger economy than the US right now, even without including Hong Kong. Indeed that would still be true if we assumed the Taiwanese price level also applied to China.

I am pretty confident that Chinese prices are actually lower than Taiwanese prices. I’m less confident that the Economist’s estimate for Taiwan is correct.

The newer World Bank numbers were criticized because the focused on prices in urban China, which are much higher than in the countryside. Most of my experience has been in urban China, so my sense of the Chinese cost of living is probably too high. But even in urban China I would find an estimate of 1/2 US prices to be quite plausible. Of course the two consumption bundles are so different that there is no right or wrong answer, it’s subjective.

So China might well be number one already. If not, I’ll come back in 2013 with even stronger arguments. By the way, they are already number one in food, clothing, new housing construction, cars, steel, cement, coal, exports, cell phones, etc, etc. Often they have huge leads over the US.

Off topic, but a few months back I did a post pointing out that the combined current account surplus of the “Nordic bloc” (Norway/Sweden/Denmark/Holland/Germany/Switzerland), was nearly 50% more than China’s surplus. Recall that old Keynesians like Paul Krugman think current account surpluses depress world AD and cost jobs in America. That’s true whether they occur naturally or due to government policy. BTW, both the Nordic and Chinese surpluses are partly natural and partly a result of explicit government policies to encourage saving.

I just checked The Economist, and the new figures are even more lopsided:

China: $259.3 billion CA surplus

Nordic bloc: $484.0 billion CA surplus.

That slave labor in the Nordic bloc is stealing all our jobs! If I was an old school Keynesian protectionist I’d be worried right now that the Nordic bloc was a sort giant blob that was sucking all the life out of the world economy. Especially Norway and Switzerland, which combine for more than $165 of the surplus, despite having only 1/10th of the Nordic bloc population, and 1/100th of China’s population. But I’m not an old school Keynesian protectionist, so I’m not worried at all. Go ahead and book that ski trip to St. Moritz, and don’t feel guilty about it.

PS. The IMF says the US price level is 75% higher than Taiwan’s.

Facebook Twitter LinkedIn

Tags:

This entry was posted on January 14th, 2012 and is filed under China. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



