World Bank: China, India GDP overstated by 40% (I showed this 3 yrs ago)
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raylopez99
Nov 30, 2007, 12:34:23 PM11/30/07
to Small Microcap Value
From this link I posted at sci.econ: http://tinyurl.com/2t5f3v
Nearly 3 yrs ago on 20/1/2005, I showed China, India's GDP is
overstated by 40% using an energy analysis.
With no grant money either! I should change fields. :-)
RL
See this link from over two years ago: http://tinyurl.com/2lenoy
where I showed, using an energy analysis, that "China GDP data widely
quoted is distorted, in particular the GDP and GDP per capita
(Purchasing Power Parity). By measuring energy consumed, using a
suitable correction variable for the energy inefficiency of communist
economies, and triangulating data with countries of proven economic
data reliability, the true GDP and GDP per capital for China can be
computed as between $2.25 trillion < PPP
(China) < $3.03 trillion, which is less than the often quoted figure
of $6.449 trillion (2004 est.) by between 33% to 50%."
Turns out I was right, see the below. I also stated that "India's GDP
is inflated by the reported figure of up to around 35%", and, as
reported below, the figure is believed to be 40%.
BTW this was never a working paper, LOL--I did that just to pique
people's interest. I'm not an economist.
RL
China GDP data corrupt [working paper]
http://www.economist.com/finance/displaystory.cfm?story_id=10209215
Economics focus
A less fiery dragon?
Nov 29th 2007
From The Economist print edition
China may be a smaller economic giant than previously thought
AMERICANS who spend their time fretting about when their economy will
be overtaken by China will have gleefully leapt upon new numbers
suggesting that China's economy may in fact be 40% smaller than
current estimates. However, the new figures, if confirmed, would also
mean that the world economy has been growing rather more slowly in
recent years than officially reported by the IMF, which is less
salutary for everyone.
It is not the Chinese government that has been exaggerating the size
of its GDP, but international organisations, such as the World Bank
and the IMF, which measure each nation's output in terms of purchasing-
power parity (PPP). If China's GDP is converted into dollars using
market exchange rates it amounted to $2.7 trillion last year, only one-
fifth of America's $13.2 trillion, and the fourth-largest in the
world. But a dollar buys a lot more in China than in America because
prices of many non-traded goods and services tend to be much lower in
poor economies. Converting a poor country's GDP into dollars at market
exchange rates therefore understates the true size of its economy.
Instead many economists prefer to convert GDPs into dollars using
PPPs, which take account of price differences between countries. The
Economist's Big Mac index is a crude measure of PPP. Much more
sophisticated estimates are produced by the International Comparison
Programme, co-ordinated by the World Bank, which gathers prices for
more than 800 goods and services in countries around the globe. On a
PPP basis, the World Bank ranks China as the world's second-biggest
economy, with a GDP of $10 trillion last year. At its recent pace of
growth, China's GDP could overtake America's by 2010.
The World Bank's estimate for China is widely used by economists. Yet
few realise that it is based on a lot of guesswork, as the bank's
previous international price surveys have not included China. Instead,
it extrapolated from a study of prices in America and China that dates
all the way back to the 1980s. The bank's latest price-comparison
study, due to be published in mid-December, does include China for the
first time, and preliminary evidence indicates that its GDP has been
overstated in the past. In a recent article in the Financial Times,
Albert Keidel, an economist at the Carnegie Endowment for
International Peace, noted that PPP figures published by the Asian
Development Bank (ADB), as part of its input into the World Bank's
International Comparison Programme, implied that China's GDP was 40%
smaller than the number reported by the World Bank. Interestingly, the
new figure is very close to what the Big Mac index has indicated all
along.
Mr Keidel's claim is itself based on some guesswork. The ADB report
does not actually reveal the yuan's revised PPP rate against the
dollar, as it only compares prices with those in Hong Kong, not
America. To derive dollar PPPs Mr Keidel has assumed that relative
prices in Hong Kong and America have not changed since previous
studies. If this holds, then China's implied GDP is indeed 40% smaller
than before. The World Bank says that it is still discussing the final
numbers. Note, however, that the ADB figures imply that India's GDP is
also now 40% smaller, even though India has taken part in previous
international pricing surveys (suggesting that Hong Kong's PPP may in
fact have changed). It is thus possible that China's GDP may be
trimmed by less than 40% when the World Bank publishes its final
report.
Assume for a moment that Mr Keidel's figure of 40% is correct, then
China's GDP in PPP terms is slashed from $10 trillion to $6 trillion.
That would still leave it as the world's second-largest economy, but
it would not overtake America for at least another ten years. India,
on the other hand, would drop from third to fifth place in the world
ranking.
Adjusting the global speedometer
China would probably be quite happy to see its GDP revised down,
hoping that America might stop picking on a smaller, poorer economy.
But revised PPPs would not only change international rankings, they
would also affect the pace of global growth. To calculate world GDP
growth, individual countries' growth rates are weighted by their share
of world output. Using PPP weights, as the IMF does, the world economy
has grown by an average of 5% over the past five years, its strongest
pace since the early 1970s. This is largely because emerging economies
have been growing by 7.5% a year (compared with only 2.3% in the G7
developed economies), and they account for around half of world GDP.
But if China and India are 40% smaller than previously thought, world
growth would be trimmed to 4.5%.
The difficulty of measuring PPP is one reason why some economists
prefer to compare the sizes of economies using market exchange rates.
After all, it is argued, countries trade with each other at market
rates, so these provide the best basis for comparison. Measured this
way, world growth over the past five years has been a still more
modest 3.4%. Far from being the fastest pace for decades, that is
slower than in the 1980s (see left-hand chart). So has the global boom
been a mirage? A closer look at the numbers shows that this cannot be
right. Measured at market exchange rates, emerging economies' share of
global output last year was less than in 1980 (see right-hand chart),
even though they have been growing more than twice as fast as the rich
economies. The increase in their share of global energy consumption,
from 43% in 1980 to 55% in 2006, also confirms that their weight in
the world economy has surely risen.
The raw dollar numbers are distorted by big currency swings. For
instance, the devaluations in East Asian economies in 1997-98 grossly
exaggerated the drop in their output. Measured at PPP, emerging
economies' share of world output has more realistically risen since
1980--and even if China's economy is smaller than thought, it is still
a mighty beast. PPP data may be imperfect, but they give a better
picture of the relative size of economies than market exchange rates
do. In the words of John Maynard Keynes, "It is better to be roughly
right than precisely wrong."
Nearly 3 yrs ago on 20/1/2005, I showed China, India's GDP is
overstated by 40% using an energy analysis.
With no grant money either! I should change fields. :-)
RL
See this link from over two years ago: http://tinyurl.com/2lenoy
where I showed, using an energy analysis, that "China GDP data widely
quoted is distorted, in particular the GDP and GDP per capita
(Purchasing Power Parity). By measuring energy consumed, using a
suitable correction variable for the energy inefficiency of communist
economies, and triangulating data with countries of proven economic
data reliability, the true GDP and GDP per capital for China can be
computed as between $2.25 trillion < PPP
(China) < $3.03 trillion, which is less than the often quoted figure
of $6.449 trillion (2004 est.) by between 33% to 50%."
Turns out I was right, see the below. I also stated that "India's GDP
is inflated by the reported figure of up to around 35%", and, as
reported below, the figure is believed to be 40%.
BTW this was never a working paper, LOL--I did that just to pique
people's interest. I'm not an economist.
RL
China GDP data corrupt [working paper]
http://www.economist.com/finance/displaystory.cfm?story_id=10209215
Economics focus
A less fiery dragon?
Nov 29th 2007
From The Economist print edition
China may be a smaller economic giant than previously thought
AMERICANS who spend their time fretting about when their economy will
be overtaken by China will have gleefully leapt upon new numbers
suggesting that China's economy may in fact be 40% smaller than
current estimates. However, the new figures, if confirmed, would also
mean that the world economy has been growing rather more slowly in
recent years than officially reported by the IMF, which is less
salutary for everyone.
It is not the Chinese government that has been exaggerating the size
of its GDP, but international organisations, such as the World Bank
and the IMF, which measure each nation's output in terms of purchasing-
power parity (PPP). If China's GDP is converted into dollars using
market exchange rates it amounted to $2.7 trillion last year, only one-
fifth of America's $13.2 trillion, and the fourth-largest in the
world. But a dollar buys a lot more in China than in America because
prices of many non-traded goods and services tend to be much lower in
poor economies. Converting a poor country's GDP into dollars at market
exchange rates therefore understates the true size of its economy.
Instead many economists prefer to convert GDPs into dollars using
PPPs, which take account of price differences between countries. The
Economist's Big Mac index is a crude measure of PPP. Much more
sophisticated estimates are produced by the International Comparison
Programme, co-ordinated by the World Bank, which gathers prices for
more than 800 goods and services in countries around the globe. On a
PPP basis, the World Bank ranks China as the world's second-biggest
economy, with a GDP of $10 trillion last year. At its recent pace of
growth, China's GDP could overtake America's by 2010.
The World Bank's estimate for China is widely used by economists. Yet
few realise that it is based on a lot of guesswork, as the bank's
previous international price surveys have not included China. Instead,
it extrapolated from a study of prices in America and China that dates
all the way back to the 1980s. The bank's latest price-comparison
study, due to be published in mid-December, does include China for the
first time, and preliminary evidence indicates that its GDP has been
overstated in the past. In a recent article in the Financial Times,
Albert Keidel, an economist at the Carnegie Endowment for
International Peace, noted that PPP figures published by the Asian
Development Bank (ADB), as part of its input into the World Bank's
International Comparison Programme, implied that China's GDP was 40%
smaller than the number reported by the World Bank. Interestingly, the
new figure is very close to what the Big Mac index has indicated all
along.
Mr Keidel's claim is itself based on some guesswork. The ADB report
does not actually reveal the yuan's revised PPP rate against the
dollar, as it only compares prices with those in Hong Kong, not
America. To derive dollar PPPs Mr Keidel has assumed that relative
prices in Hong Kong and America have not changed since previous
studies. If this holds, then China's implied GDP is indeed 40% smaller
than before. The World Bank says that it is still discussing the final
numbers. Note, however, that the ADB figures imply that India's GDP is
also now 40% smaller, even though India has taken part in previous
international pricing surveys (suggesting that Hong Kong's PPP may in
fact have changed). It is thus possible that China's GDP may be
trimmed by less than 40% when the World Bank publishes its final
report.
Assume for a moment that Mr Keidel's figure of 40% is correct, then
China's GDP in PPP terms is slashed from $10 trillion to $6 trillion.
That would still leave it as the world's second-largest economy, but
it would not overtake America for at least another ten years. India,
on the other hand, would drop from third to fifth place in the world
ranking.
Adjusting the global speedometer
China would probably be quite happy to see its GDP revised down,
hoping that America might stop picking on a smaller, poorer economy.
But revised PPPs would not only change international rankings, they
would also affect the pace of global growth. To calculate world GDP
growth, individual countries' growth rates are weighted by their share
of world output. Using PPP weights, as the IMF does, the world economy
has grown by an average of 5% over the past five years, its strongest
pace since the early 1970s. This is largely because emerging economies
have been growing by 7.5% a year (compared with only 2.3% in the G7
developed economies), and they account for around half of world GDP.
But if China and India are 40% smaller than previously thought, world
growth would be trimmed to 4.5%.
The difficulty of measuring PPP is one reason why some economists
prefer to compare the sizes of economies using market exchange rates.
After all, it is argued, countries trade with each other at market
rates, so these provide the best basis for comparison. Measured this
way, world growth over the past five years has been a still more
modest 3.4%. Far from being the fastest pace for decades, that is
slower than in the 1980s (see left-hand chart). So has the global boom
been a mirage? A closer look at the numbers shows that this cannot be
right. Measured at market exchange rates, emerging economies' share of
global output last year was less than in 1980 (see right-hand chart),
even though they have been growing more than twice as fast as the rich
economies. The increase in their share of global energy consumption,
from 43% in 1980 to 55% in 2006, also confirms that their weight in
the world economy has surely risen.
The raw dollar numbers are distorted by big currency swings. For
instance, the devaluations in East Asian economies in 1997-98 grossly
exaggerated the drop in their output. Measured at PPP, emerging
economies' share of world output has more realistically risen since
1980--and even if China's economy is smaller than thought, it is still
a mighty beast. PPP data may be imperfect, but they give a better
picture of the relative size of economies than market exchange rates
do. In the words of John Maynard Keynes, "It is better to be roughly
right than precisely wrong."
JOSE BAILEN
Nov 30, 2007, 1:10:59 PM11/30/07
to small-micr...@googlegroups.com
Yes, the purchasing power parity index used by the World Bank is very
inaccurate for countries like China or India. In any case, even if
China reaches some day the US income level -with the correct estimates
and current growth rates, it will take now more than 15 yrs instead of
just 3-4 years- this would mean a per capita income of just about 22
percent of the U.S's (the U.S population of 300 million is just 22
percent of China's population -1.32 billion people-). The productivity
and technological gap between the US and China is still enormous.
inaccurate for countries like China or India. In any case, even if
China reaches some day the US income level -with the correct estimates
and current growth rates, it will take now more than 15 yrs instead of
just 3-4 years- this would mean a per capita income of just about 22
percent of the U.S's (the U.S population of 300 million is just 22
percent of China's population -1.32 billion people-). The productivity
and technological gap between the US and China is still enormous.
The article on the US dollar in this week's issue of The Economist is
quite interesting as well. Using purchasing power parity estimates and
exchange rate equilibrium models -the Bundesbank and the IMF have
several papers on this issue-, the US is about 30 percent below of its
long term equilibrium parity vs the euro (about 1.15 dollars per
euro). For a value investor, this means that this is the right time to
invest in relatively cheap U.S. dollar assets: in the long term one
would get not only the rate of return of US stocks but also exchange
rate gains.
Table with long-term returns of different international markets
("Shiller data since 1871.xls" file in the files section of this
group):
Table 1: Real Equity Returns in 17 Countries, 1900–2005
Annualized Returns (% p.a.)
Country 1900 to 1990 to Std.
2005 2005 Devn.
Belgium 2.4 7.20 22.1
Italy 2.46 3.74 29.07
Germany 3.09 4.65 32.53
France 3.6 7.22 23.16
Spain 3.74 8.53 21.88
Norway 4.28 9.25 26.96
Switzerla 4.48 9.14 19.73
Japan 4.51 -3.03 30.05
Ireland 4.79 9.30 22.1
Denmark 5.25 8.23 20.26
Netherland5.26 9.09 21.29
United Kin 5.5 6.47 19.96
Canada 6.24 6.80 16.77
United Sta. 6.52 7.87 20.19
South Africa7.25 7.03 22.57
Australia 7.7 8.53 17.64
Sweden 7.8 9.13 22.62
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