Dean Baker — China as Number One: The Relative Size of the U.S. and Chinese Economies

PPP rather than GDP.

Purchasing power parity calculations of GDP attempt to measure all the goods and services produced by a country with a common set of prices. This means we add up all the cars, tables, haircuts, knee surgeries etc. produced in both the U.S. and China, and assume that each item costs the same in both countries.

According to the projections from the I.M.F. China's GDP is already 25 percent larger by this measure and will be almost 50 percent larger by the end of the projection period in 2022….

Beat the Press
China as Number One: The Relative Size of the U.S. and Chinese Economies
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C.

Marshall Auerback — Trump’s Bogus Infrastructure Plan Takes the U.S. Further Down the Road of Rentier Capitalism

President Trump presented his infrastructure plan last week. If you’re keen on the idea of out-of-control privatized utilities gouging customers and manipulating energy markets, or consortia building overpriced, expensive toll roads (until they go bust), then you’ll love the president’s proposals. His mooted public-private partnerships are another variant of socialism for the rich and free market discipline for the rest of us. PPPs are like a religion that offers its adherents the promise of capitalist heaven via tax breaks, subsidized funding, and guaranteed returns, minus the discipline of private bank credit arrangements or potential bankruptcy, the costs of which are invariably borne by a public already experiencing the hell of significantly more restricted access (think toll roads and bridges), higher user fees or “slower lane” traffic (think the end of net neutrality), and the costs of bailouts if and when the venture goes bust....

No private market discipline is enforced on management because in most cases they are given control of what was once a public monopoly, which is simply converted into a private one. It’s rentier capitalism, plain and simple.... 

In essence, these public-private partnerships are one of the sick jokes that the neoliberal era visited on all of us in the name of economic efficiency and responsible government—a ‘joke’ because the beneficiaries of all this public largesse have been laughing all the way to the bank as stupid public officials continue to fall prey to their lobbying as they joyfully hand over the keys to the public purse. Trump is simply perpetuating the trend of allowing governments to continue to abrogate their true responsibilities to pursue and safeguard public purpose. Governments should never have become agents of private profit.…

Neoliberalism can be viewed as government as agent of private profit based on "free market" ideology that prioritizes private ownership over public because "efficiency," along with public policy that favors capital formation as the basis for growth, under the assumption that "a rising tide lifts all boats" (trickle down).

Naked Capitalism
Trump’s Bogus Infrastructure Plan Takes the U.S. Further Down the Road of Rentier Capitalism

Marshall Auerback

Cross-posted from Alternet

Jon Hellevig — Despite Sanctions Russia’s GDP Shoots over $4 Trillion – The Difference between Nominal GDP and PPP GDP Explained

According to fresh figures from the IMF (October 24), Russia’s GDP is expected to exceed $4 trillion first time ever. By this measure, Russia is the 6th largest economy in the world, virtually on par with Germany, who scored $4.15 trillion.

At the same time, China has solidified its position as the world’s indisputably largest economy. With its $23 trillion, China’s economy is already bigger 1/5th than the U.S. economy with its $19 trillion [based on PPP]....

Emerging countries, and not only China, are developing quickly as they play catch up, while the developed countries are topping out in comparison.

Hellevig explains PPP versus nominal GDP in terms of the economic goods that are real and financial goods that are monetary. Economic comparison is best done using actual output rather than nominal value. Most of the post is about this. It is worth reading in full. Here are the highlights.

These GDP figures are calculated according to the PPP method. PPP stands for purchasing power parity and it aims to capture the value of the real economic output contrary to the method of rendering GDP in nominal USD figures. The nominal method, converts a country’s GDP calculated in the local currency to the USD using the market exchange rates. The figures calculated with the nominal method is what the media tends to report. But, the Nominal GDP method contains several grave errors. There’s a huge calculation bias in favor of the countries possessing the dominant world currencies, that is, the Western countries. Thanks to the dominant currencies, their GDPs tend to be inflated in value as compared with the countries with currencies that are not widely used globally. This way, the economies of the Western countries would seem bigger than they are if one only goes by the nominal market exchange value....

Before we proceed further, I must note that any GDP (Gross Domestic Product) calculation is a statistical exercise based on a host of assumptions on how to arrive to the total value of everything produced. Therefore, the step from Nominal GDP to PPP method is just one of the thousands of assumptions, the one method is not based on more exact input data than the other.

The volume of the economy is expressed in a monetary form, because that is the only way you can make all the millions of products statistically comparable, but what we really need to know is how much of each product has been produced, how many cars, how many houses, how many tomatoes etc. But, by using the USD exchange rate as the multiplier we lose the comparability. (Global GDP comparisons are always given in USD).

If one kilo of tomatoes costs 90 rubles or 1.5 USD in Russia and 4.5 USD in the States, then according to the Nominal method the U.S. economy would be 3 times bigger by this parameter, even though both countries would produce the same amount of tomatoes. In fact, on average, almost everything is 3 or 4 times less expensive in Russia, therefore, by converting the Russian prices to USD according by the market exchange rate, Russia’s economy would seem 3 to 4 times smaller than it actually is. This is where the PPP method comes in to remove the calculation biases and currency fluctuations. The PPP method looks beyond the US dollar, striving to capture the actual volume of goods and services produced in a country. In comparing the size of the economy of different countries, that is precisely what we want to do, to measure their real output of goods and services.

The starting point for the PPP GDP is the Nominal GDP calculated in the local currency of any country. This is then adjusted by the PPP coefficient, which is the average price difference between products in the given country and the U.S. The local GDP figure is multiplied with the PPP coefficient and this way we reach the more accurate comparison of the actual volumes of the economies. We are still using the USD as the currency for comparing all the world’s economies, but have adjusted them to eliminate the market exchange rate biases.

Another way to express this is to say that we check how much of any given product we can by for one dollar in various countries.…

I often find myself in online arguments with Nominal GDP apologists, where I go through all these arguments and many more. But, they just go on and on, till we come to the final argument that would shut them up – literally. I tell them that Russia’s nominal GDP in 2016 was $1.28 trillion and it is expected to reach $1.47 trillion by 2017. That’s a 14.5% growth, I point out, and then I ask them to explain how Russia has reached this absolutely spectacular growth. “That’s not real growth, it’s just the exchange rate difference when the ruble appreciated,” they frown. – Exactly, that’s what it is. That’s what the Nominal GDP is, an illusion based on fluctuating and biased exchange rates.

Awara
Despite Sanctions Russia’s GDP Shoots over $4 Trillion – The Difference between Nominal GDP and PPP GDP Explained
Jon Hellevig | Founder

Knoema — The world’s largest economy: China or the United States?

Take the defense budget. While the actual figures are a state secret, the reported figures show the US to be greatly outspending China with the implication that the US military is larger than the PLA. That may be a false implication, however, since China has nowhere near the economic rent in military expenditure that the US does. That means bigger bang for the buck since more of the expenditure goes into production.

Real-World Economics Review Blog
The world’s largest economy: China or the United States?

Jon Hellevig — Russia Still World’s Sixth Largest Economy (PPP)

Notwithstanding the above, somebody might want to lead you astray and claim that Russia’s economy is only the 13thbiggest at a size of 1.2 trillion. Here’s the catch, the first set of figures is based on the purchasing power parity (PPP) whereas the second awarding Russia’s economy the far lesser size is based on a calculation by the nominal current USD/RUB exchange rate. The Russia bashers will surely want to refer to the latter.

The comparison of the size of the economies across the world on the nominal GDP currency rate is utterly wrong as it only reflects shortsighted speculative differences in the exchange rates. The PPP-method on the contrary determines the size based on the real output of a country. Basically, the method is to compare how much a U.S. dollar fetches in different countries, and then to adjust the nominal GDP with the coefficient thus derived. (As the USD, is the currency of comparison, the nominal GDP and the PPP GDP are by definition always the same for the USA). 

Awara Blog
Russia Still World’s Sixth Largest Economy
Jon Hellevig

Scott Sumner — Report from China

My wife is currently in China, and reported back on recent changes:

Interesting.

The Money Illusion
Report from China

Scott Sumner

C.P. Chandrasekhar and Jayati Ghosh — China and India in the World Economy

Indian media – as well as several official representatives of the government – are full of excitement at the possibility that in the coming year India’s rate of growth of economic activity might actually be higher than that of China. It is not just that the extremely rapid growth of the giant Asian neighbour is slowing down substantially, but also that India’s GDP growth is projected to be higher than before, and the CSO’s latest revisions to the GDP estimates suggest that the recent deceleration was less sharp than generally perceived. 

But as it happens, over the past two decades the differential performance of the two economies has been such that – even with the recent slowdown – China is still likely to account for a larger contribution to global GDP growth than India for some time to come, simply because of its much greater size.....

Triple Crisis
China and India in the World Economy

C.P. Chandrasekhar and Jayati Ghosh

Matias Vernengo — What's the deal with PPP?

It is obvious that there are 'imperfections' and the natural rate of interest is not equalized in the real world, so the exchange rate also deviate from the natural rate. But that isn't the main problem with the mainstream view. As we saw, the capital debates undermine the theoretical basis for a natural rate of interest, and hence for a natural exchange rate (or a natural rate of unemployment for that matter). Hence, it is the Keynesian (and Sraffian) institutional rate of interest, as determined by monetary authorities that rules the roost. The conventional rate of interest is then connected to a conventional exchange rate [ther institutional factors become relevant, like the existence or not of capital controls, etc.].

Leave aside the theoretical problems of purchasing power parity measures, since they are NOT attractors of the actual exchange rates [the reasons why Argentina had a 1 to 1 exchange rate with the dollar for a decade, or Greece has a 'fixed' parity too are political and institutional], and even if for some purposes you may want to use PPP rates as a measure of material welfare, one may also be interested in actual market exchange rates for other purposes. Indeed, for most of the relevant matters that concern economic well being, particularly in peripheral countries, like the capacity to repay foreign debt and avoid default and import capital goods to promote growth, it is the market exchange rate that is central to convert incomes in different countries into a common numeraire.

Naked Keynesianism

What's the deal with PPP?
Matias Vernengo | Associate Professor, University of Utah