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backASIAtalk January, 2008

World Bank says Chinese and Indian economies 40% smaller than estimated

New World Bank estimates show that the Asian and African economies are one-third and one-fourth smaller than previously thought, while the GDPs of China and India are 40 per cent smaller.

The International Comparison Programme (ICP) has released new data showing the world economy produced goods and services worth almost $55 trillion in 2005. Almost 40 per cent of the world’s output came from developing economies.

Carried out with the World Bank and other partners, the preliminary global report provides estimates of internationally comparable price levels and the relative purchasing power of currencies for 146 economies.

The principal outputs of the ICP are estimates of Purchasing Power Parities (PPPs) benchmarked to the year 2005. PPPs are used instead of exchange rates to convert national economic measures such as gross domestic products into a common currency.

Estimates of gross domestic product

PPPs allow comparisons of market size, the structure of economies, and what money can buy by taking account of price differences between countries.

The new PPPs replace previous benchmark estimates, many of them from 1993 and some dating back to the 1980s.

The global report brings together the results of the International Comparison Programme and the Eurostat-OECD PPP programme.

The report also provides estimates of gross domestic product (GDP) for 146 economies, along with GDP per capita, and their price level index (PLI), which shows which economies are cheapest and which are most expensive when currencies are converted using market exchange rates.

This was the most extensive and thorough effort ever to measure PPPs across countries. Teams in each region identified characteristic goods and services to be priced. Surveys conducted during 2005 collected prices for more than 1,000 goods and services.

New and innovative data validation tools were implemented to improve data quality. A representative group of economies from each region priced a common, global set of goods and services used to calibrate the regional PPPs to the global level.

Twelve economies account for more than two-thirds of the world’s output. Seven of them are high-income economies (United States, Japan, Germany, the United Kingdom, France, Italy and, Spain), and five are developing or transitional economies (China, India, Russia, Brazil, and Mexico).

More statistically reliable estimates

The five largest developing economies account for more than 20 per cent of global output and over 27 per cent of the world expenditures for investment purposes.

China participated in the survey programme for the first time ever and India for the first time since 1985. These results are more statistically reliable estimates of the size and price levels of both economies.

The previous, less reliable, methods led to estimates of their GDPs that were 40 per cent larger than the results of the new, improved methods and benchmark.

China still ranks as the world’s second largest economy with over 9 per cent of world production and India follows as the fifth largest with over 4 per cent of the world total.

Overall, the 2005 benchmark results show that the size of the world economy measured in PPP terms is smaller than previous estimates.

The Asian and African economies are one- third and one-fourth smaller, respectively. Asia still accounts for over 20 per cent of the world’s output.

Most and least expensive economies

The US, China, Japan, Germany and India account for nearly half of the world’s GDP as measured by PPPs. Brazil accounts for one-half of the South American economy, and nearly two-thirds of collective government expenditures in the region.

Russia dominates the CIS regional economy with three-fourths of the total and two-thirds of the investment shares.

The African economy is dominated by South Africa, Egypt, Nigeria, Morocco, and Sudan, which collectively account for nearly two-thirds of the region’s GDP.

The Price Level Index (PLI) shows which economies are the most and least expensive. It corresponds to travellers’ experience of making purchases after converting their currency at market exchange rates.

The Price Level Index is the ratio of a country’s PPP divided by its exchange rate to the US dollar. An index over 100 means prices are higher on average than in the US, and one less than 100 means prices are relatively lower.

The most expensive economies are Iceland, Denmark, Switzerland, Norway, and Ireland with indices ranging from 154 to 127. The United States ranked 20th in the world, lower than most other high-income economies, including France, Germany, Japan, and the United Kingdom.

The range is greater at the other end of the spectrum with more than 40 economies showing a PLI of 40 or below. The cheapest economies are Tajikistan, Ethiopia, Gambia, Kyrgyz Republic, and Bolivia.

Average living standards

Measured by GDP per capita, the five richest economies are Luxembourg, Qatar, Norway, Brunei Darussalam, and Kuwait. Collectively, they account for less than 1 per cent of the world’s output. Seventeen economies have a GDP per capita of less than $1,000. The world average is approximately $8,900 per capita.

Per capita measures of individual consumption, a measure of what households consume, provides a way to compare average living standards. By this measure, the five richest economies are Luxembourg, United States, Iceland, United Kingdom, and Norway. The world average individual consumption is approximately $6,100 per capita.

The US accounts for the largest share of the world’s expenditure for investment, but at 21 per cent, it is closely followed by China with 18 per cent.

The ten largest economies account for over more than two thirds of the world’s investment. The share of investment in low and middle income economies is larger when world shares of investment are measured in PPP terms.

Small differences

Purchasing power parities are statistical estimates. Like all statistics they are subject to sampling errors, measurement errors, and errors of classification. The report says that they should, therefore, be treated as an approximation to an unknown, true value.

It is not possible to provide a precise estimate of the margins of error, because of the process used to collect the data and calculate the PPPs. Small differences in the estimated values should not be considered significant, according to the researchers.

The World Bank warned that PPPs should not be used as indicators of the under- or overvaluation of currencies. It pointed out that they do not signify what exchange rates “should be” and that PPPs do not reflect the demand for currencies as a medium of exchange, speculative investment, or official reserves.

Source: Director of Finance Online - GAI

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