Emerging Economy Takeover!

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This chart on Paul Kedrosky’s blog is interesting:

global-nominal-gdp 1

This reminds me, though, that I feel like the PPP concept has started to run amok as of late.

Let’s say I’m a company with global operations and I’m trying to figure out what to pay people located in different offices. In this context, the fact that $1 has more purchasing power in Beijing than in Boston or Brussels is very relevant. Similarly, it makes sense in a general kind of way to say that a guy earning $30,000 a year in Beijing is almost certainly enjoying a higher standard of living than a guy earning $30,000 a year in Boston. But the specific reason our $30,000 a year guy is so much better off in Beijing is that China is full of poor people who’ll do work for cheap. Thanks to container shipping and the WTO, a person in Boston can take advantage of poor Chinese people’s willingness to work in factories for very little money. But you have to actually live in Beijing to take advantage of the cheap haircuts, housekeepers, food carts, and whatever else that China has to offer.

To my mind, though, this makes a hash out of the idea that it makes sense to inflate our estimate of China’s output as a whole by using the PPP adjustment. China’s relatively low GDP when not PPP-adjusted reflects the fact that thanks to China being so full of poor people, its domestic market is quite small on a per capita basis. That seems to me to be a real feature of the Chinese economy that we don’t want to “adjust” away.