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> So, it's not entirely clear if China is really the biggest economy, or just by using an accounting trick called PPP GDP. There is no objective way of measuri
by jvm 12y ago
> So, it's not entirely clear if China is really the biggest economy, or just by using an accounting trick called PPP GDP.
There is no objective way of measuring the size of an economy.
Imagine some hyper-simplified economies where the only asset produced is computers.
Economy A sells 1000 Apple IIs* per year at $3k each. That means it has a nominal GDP of $3m.
Economy B sells 1000 Retina Macbook Airs at $1k each, for a nominal GDP of $1m.
Which is a bigger economy? Nominal GDP says Economy A is bigger: more dollars traded hands. PPP GDP says Economy B is bigger, since Retina Macbook Airs are much more than 3x better than Apple IIs, so the value being produced is greater. But of course this also means we have to define PPP, which is extremely challenging in the context of any modern economy.
It gets even crazier:
Economy C, the government pays workers $5m total to dig unwanted ditches. Nobody gets a computer.
In terms of nominal GDP, Economy C is bigger than Economies A and B.
- crdoconnor 12y ago>It gets even crazier: > >Economy C, the government pays workers $5m total to dig unwanted ditches. Nobody gets a computer. Because GDP is not nor was it ever meant to be a measure of how great your country is. It is simply a measure of the total volume of transactions (which correlates to wealth but is far from being the same thing).
- jvm 12y agoCertainly Nominal GDP is a measure of the volume of transactions. However, PPP-adjusted GDP is intended to be a measure of national income in real terms, or put another way, the amount of value actually produced. Which is how people often intuitively think of GDP.
- crdoconnor 12y agoUm, $5 million to dig a ditch still means no value produced even if it was PPP adjusted.
- jvm 12y agoNominal GDP: $5mil PPP adjusted: $0
- crdoconnor 12y agoPPP simply adjusts for local costs. It does not adjust for the value created during a transaction.
- austinz 12y agoBasically, all forms of measuring GDP are 'accounting tricks' to some extent, or to be more charitable they are estimates based on necessarily incomplete data. For example, by its nature the informal sector can't be precisely measured, but its contribution to total economic output can't be ignored. http://en.wikipedia.org/wiki/Informal_sector http://en.wikipedia.org/wiki/Informal_sector
- AmirS2 12y agoIn Economy C, the workers who've been paid by the govt can then purchase 5000 Retina Macbook Airs at $1k each, the govt receives sales tax, apple employees get paid and pay income tax, and apple employees then spend their remaining money buying more Macbook Airs (going by your simpification that the only asset produced is computers) ... net GDP is then some way over $10m and everybody has a computer and is employed either producing computers or digging ditches I would suggest that hyper-simplified economies are probably not a good model for anything ...
- jvm 12y ago> In Economy C, the workers who've been paid by the govt can then purchase 5000 Retina Macbook Airs at $1k each You are assuming transaction costs of 0 for international trade. If transaction costs for international trade are zero, then yes, of course the PPP adjustment would be a non-op. In the real world that we live in, equivalent goods often have very different prices in different countries.
- cmsmith 12y agoExcept that apple doesn't want to sell computers for C$, because all it can buy with them is ditches.
- tomp 12y agoYour example is exactly comparing the economies by PPP, without taking into account the exchange rates. The point is that if you establish trade between economies A, B, and C, people in A would figure out they can get a better deal by buying computers from B, hence the exchange rate would rise, and B$ will be worth A$10 or so. And $C will inflate rapidly, with the government eventually going effectively bankrupt.
- jvm 12y agoPoint taken, but you could imagine a state of affairs where the costs of trade are so high that the imbalanced prices do actually represent equilibrium, e.g. imagine tariffs are 100,000% and well-enforced. In the real world non-zero exchange costs are the reason why price differences across countries for identical goods aren't just immediately arbitraged away.