Monday, January 07, 2008

PPP is a Tricky Bastard

The idea that it doesn't matter how much money you make, but rather how much stuff that you can buy not only explains why "the government can't just print off more money" but also allows us to compare the true standards of living in different countries.

$5,000 here in the US may not be a lot, but in Indonesia it will get you pretty far.

Even locally you can see the purchasing power parity effect where a $50,000 salary will have you sitting pretty in Fargo, but have you dirt poor in New York City.

In any case, comparing cost of living adjustments in the US is one thing as the country is relatively homogeneous. But comparing standards of living in Ethiopia versus Britain presents a slightly more difficult problem. So it should be no surprise that when international entities like the IMF and World Bank revise their PPP adjustment ratios then large sways in standards of living and GDP's can occur between different countries. And such is the case in China.

Don't get me wrong. China still is by all official measures the second largest economy in the world. But when the World Bank updated their PPP exchange rates, it lobbed off 40% of China's RGDP.

Alas it seems it will be 2020 before China surpasses the US as the world's largest economy. not 2016 as I predicted.

1 comment:

Anonymous said...

Money exchange ratio is such problem in assessing country's wealth. In last Chinese dynasty, the emirial govement required any foreign trade transaction to be paid by silver or gold in order to avoid exploidation by exchange ratio. Well, China was rich because of that. Also, it leaded to many wars due to exhaustion of silver in the west.