It is a joke to measure the size of economies between countries in terms of GDP estimated at purchasing power parity

Executive Summary:

In January, Putin had just announced that Russia would become the largest economy in Europe. Lin Yifu, a professor at Peking University, said that China's GDP surpassed that of the United States in 2017, ranking first in the world. It is a joke to measure the size of economies between countries based on the IMF's PPP estimates of GDP used to measure productivity and basic living standards. There are major accounting loopholes in the GDP estimated by PPP. Comparing the size of the economy, the SNA method is used by default in the world. Comparing the GDP of the SNA method, the economic scale of China, the United States and Russia is very different.

1. In January, Putin just announced that Russia would become the largest economy in Europe.

If the memory of the Chinese surpasses the goldfish by less than 7 seconds, it will not be forgotten that on January 11, many of our media and self-media accounts reported that Putin said when meeting entrepreneurs in the Russian Far East that Russia has become the first economy in Europe. Putin also said that despite various sanctions and restrictions, Russia's economic growth cannot be limited. Russia is growing more and more and full of opportunities.

Putin also said that Russia's economic development is still unstoppable, and the reason is that Russia has opened up many partners abroad, including Africa and other regions, which has also led to a huge increase in Russian exports. At the same time, Russia has also taken the initiative to establish in-depth cooperative relations with other countries, which has also made its economy rise rapidly in the short term.

Putin added, on the contrary, sanctions against Russia have greatly limited its economic development, which explains why Europe's economy has been so sluggish this year.

2. Lin Yifu, a professor at Peking University, said that China's GDP surpassed that of the United States in 2017, ranking first in the world.

On May 15, 2022, Lin Yifu, dean of the Institute of New Structural Economics of Peking University, said in a speech at the 2022 Tsinghua PBC Chief Economist Forum with the theme of "2022 in Turmoil - Global and China's Economic and Policy Outlook" that according to a report released by the World Bank, China's GDP reached US$19.6 trillion in 2017 in terms of purchasing power parity PPP, surpassing the US$19.5 trillion of the United States and ranking first in the world.

Lin Yifu also said that in the process of such changes in the global map, psychologically speaking, the biggest loser is the United States. Because throughout the 20th century, the United States was the world's largest economy.

3. It is a joke to measure the size of economies between countries based on the IMF's PPP estimates of GDP used to measure productivity and basic living standards.

In economic comparison, if you compare data that looks similar in name, but have completely different calibers and purposes, it will make a low-level joke. For example, Putin believes that Russia's economy is the largest in Europe, and Lin Yifu believes that China's economy surpassed the United States in 2017 to be the world's largest. Because there are a lot of statistics, the caliber is complex, and the uses are different.

A single gross domestic product (GDP) is a difference in size between current and comparable prices, in local currency and in US dollars;

In terms of growth rate, there are differences between the month-on-month and year-on-year, the month-on-month and month-on-month annualized rate, the initial month-on-month and the seasonally adjusted month-on-month (seasonal trimming);

In terms of accounting systems, there are the United Nations SNA (System of National Accounts Accounting) accounting method GDP and the International Monetary Fund (IMF) PPP accounting method GDP.

Putin believes that Russia has become the largest economic power in Europe, and Lin Yifu believes that China's economic scale surpasses that of the United States as the world's largest, based on the GDP released by the IMF and calculated by the PPP accounting method.

When someone uses the PPP method to estimate GDP to compare the European economy or the global economy, maybe 99% of people will not think about the following questions:

First, why do national statistical offices, especially developing countries, only calculate GDP according to the United Nations system of national economic accounts, but never calculate GDP of PPP caliber?

We have been using various methods to improve the self-confidence of the whole people, so why didn't the National Bureau of Statistics switch to the PPP method to calculate GDP and then surpass the United States in one fell swoop to boost self-confidence?

The second is why, according to the IMF's PPP accounting method, China's PPP GDP is 123% of that of the United States, and according to the United Nations SNA method, China's GDP is only 65.9% of that of the United States. But when the United Nations and other international organizations pay their contributions, the United States does not require the payment of contributions in accordance with the PPP law GDP that favors itself?

Fourth, there are major accounting loopholes in the GDP estimated by PPP. Comparing the size of the economy, the SNA method is used by default in the world.

In fact, the IMF's method of economic accounting for purchasing power parity (PPP) originated from The Economist's famous Big Mac index, which tracks the price of McDonald's Big Mac hamburgers in many countries since 1986. On top of this, the IMF has added prices for hundreds of different goods and services.

According to the IMF's authoritative interpretation, purchasing power parity is the exchange rate at which one country's currency is exchanged for another country's currency (usually the US dollar) to buy the same amount of a large number of products, and is used to compare differences in economic productivity and basic living standards between countries.

In layman's terms, the calculation process of this PPP is as follows:

First, identify a basket of goods and services. Suppose only the price of burgers and haircuts is determined. In China, $100 can buy 29 burgers and 20 haircuts. Buy 20 burgers or get a haircut 4 times in the United States.

Second, if the weight of hamburger and haircut consumption is 50% each, according to (29*50%+20*50%)/(20*50%+4*50%), then the purchasing power of RMB is calculated to be 204.2% of the RMB exchange rate.

Third, in 2023, China's GDP under the dollar-denominated SNA method will be $17.7 trillion, 17.7*204.2%, and China's PPP GDP will be $36.1 trillion, 32% more than the $27.37 trillion in the United States.

As a statistics professional, Saburo also found that there are at least four major shortcomings in PPP accounting in combination with the problems in PPP accounting admitted by the IMF itself:

One is that PPP attempts to determine the difference in the purchasing power of a country's local currency and exchange rate through the price of goods and services, but in reality, even within a country, there are huge differences in prices in different regions.

For example, the price of rice in Harbin and the price of rice in Xiantao in Hubei, the price of haircuts in Shanghai and the price of haircuts in Pingdingshan in Henan Province are very different due to problems such as shop rent, staff salaries, and transportation costs. According to the PPP method, the economic scale of provinces with large populations but backward economies in the west may exceed that of cities with fewer people but developed economies in the east.

Second, the IMF itself admits that the price accounting in the PPP GDP estimation scheme is an arduous statistical task, and it has only the ability to update the prices of a very small number of varieties every year.

THE SCREENSHOT BEFORE THIS PARAGRAPH IS FROM THE ARTICLE "PURCHASING POWER PARITY: WEIGHTS MATTER" ON THE IMF'S OFFICIAL WEBSITE. Roughly speaking, the prices on which they estimate GDP under the PPP method are based on which the vast majority of goods and services prices were estimated 10 or even 20 years ago, not the actual prices offered by countries. This means that the measurement of the PPP rate is actually very incorrect.

That's why the IMF has never released its raw price data for estimating the GDP of each country's PPP methodology. Because the PPP method is used to estimate the raw sector of GDP, the IMF is well aware of its raw price data, which does not stand up to public scrutiny.

Third, the accounting results of PPP deny the contribution of transportation, service quality, environment, and rent to the economy, but in fact, these are precisely the trend and direction of economic development.

Based on this characteristic, the more economically backward the place, the more the result of PPP accounting increases compared with the SNA method.

For example, in India, the GDP calculated by the SNA method is only 20% of China's, and the GDP calculated by PPP reaches 42% of China's.

Fourth, economic accounting, from physical accounting to monetary accounting, and from material transactions to monetary transactions with international trade, is the direction of human social progress.

The core of the so-called purchasing power parity accounting (PPP) is to try to eliminate the impact of commodity prices and currency prices (exchange rates) on economic activities by accounting for physical quantities. This is incompatible with the reality of economic activity and is also seriously at odds with the trend of economic development. Because all economic activities of enterprises and enterprises, people and people, regions and regions, and countries and countries are based on the price of commodities and money. Humanity can never go back to the era of barter.

Economists Michael R. Pakko and Patricia S. Pollard, in their famous paper on purchasing power parity, "Burgernomics", also specifically explained why the theory of purchasing power parity does not reflect the real economy well.

Fifth, using the SNA method of GDP comparison, the economic scale of China, the United States and Russia is very different.

In 2023, the GDP of the United States calculated using the SNA method will be 27.37 trillion US dollars, and the current GDP will increase by 6.3% from the previous year.

China's GDP was $17.7 trillion, 35.3% less than that of the United States, and the current GDP of the local currency grew by 4.6%, but the GDP of the dollar fell by 1.2%. China's economy remains the second largest in the world.

Russia's GDP was $1.86 trillion, 93.2% less than that of the United States, and the current GDP of the local currency increased by 12.9%, but the dollar GDP fell by 17%. Russia's economy is the fifth largest in Europe below Germany, the United Kingdom, France, and Italy, and the 11th largest in the world in terms of the size of the global economy, lower than Canada.

The fifth largest economy in Europe also dares to claim to be the first in Europe, Putin's economic common sense confirms the saying: "The ignorant are fearless"!

The same is true for Lin Yifu.

[Author: Xu Sanlang]