The economies of India and China could be larger than many people have thought. A new study from the World Bank now has some experts predicting that China will become the world’s largest economy–by one measure–this year. The same study says that India’s economy could pass Japan’s as the world’s third largest.
To get their results, the researchers used a different way to measure the size of a nation’s economy. Usually economists measure by a country’s gross domestic product: the value of all goods and services it produces. But, some say a different method called purchasing power parity, or PPP, is a better measure. It examines differences in the cost of living among nations.
The report is from the International Comparison Program, which was established by the United Nations. The results are based on prices in 2011. Kamel Mellahi is a professor at the University of Warwick in Britain. He says PPP provides economists with a way to compare the costs of ordinary things that people need in different countries.
“You take a basket of goods that we all buy, including milk, butter, sugar, go(ing) to the movie, price of (a) haircut, in different countries and they look at the cost of that in different countries.”
Experts then establish a base exchange rate and use it to compare economies.
The gross domestic product measure uses market-based exchange rates to compare economies. They are exchange rates paid by travelers and exporters. So the main difference between GDP and PPP is how exchange rates are computed.
Greg McBride is Chief Financial Analyst at Bankrate.com. He says PPP avoids some problems. But it is more like an estimate than a measurement.
“There is a huge margin of error there that I think can really throw the validity of the whole thing into question.”
World Bank information shows that China’s GDP was about eight trillion dollars in 2012. That was half the size of the 16-trillion-dollar US economy.
However, Professor Mellahi says the GDP measurement underestimates developing economies.
“With traditional GDP, people always said it underestimates the size of economies in developing countries, and some of the emerging economies.”
The economies of China and India continue to grow at rates higher than most developed economies. However, China and India rate far below other large economies when their economies are compared with their populations.
I’m Mario Ritter.