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Home Publications Blogs Beat the Press China Has Long Been the World's Second Largest Economy: NYT Kills Electrons for Nothing

China Has Long Been the World's Second Largest Economy: NYT Kills Electrons for Nothing

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Sunday, 15 August 2010 20:15

The NYT is touting the big news. China just passed Japan as the world's second largest economy! This is painful because the piece badly misleads readers about the relative size and importance of China's economy.

Measured by purchasing power parity -- a measure that assigns the same price to goods and services regardless of where they are produced -- China has long been the world's second largest economy and in fact is already more than twice as large as Japan's economy. It is only by using an exchange rate measure of GDP that China's economy ends up being a close rival of Japan.

The exchange rate measure adds up the size of the economy's output in its own currency, then it converts this measure into dollars at the current exchange rate. Of course there is a large arbitrary component of the exchange rate at any point in time. In China's case, the government has a policy of deliberately depressing the value of its currency. Some estimates put the under-valuation at more than 40 percent. If China allowed the value of its currency to rise, then its exchange rate measure of GDP would rise accordingly. In other words, China could have passed Japan in GDP by this measure two years ago if it had allowed its currency to rise by 20 percent against the dollar.

This is why economists generally use the purchasing power parity measure for most purposes. This much better reflects the relative productive capacity of different countries' economies.

Comments (42)Add Comment
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written by izzatzo, August 15, 2010 10:08
Don't be giving Paul Ryan any more ideas. Next thing you know he'll be proposing a new market basket of goods for the unemployed based on equivalent purchasing parity, claiming they're better off because eating cold beans from a can is cheaper than a Big Mac.
...
written by purple, August 15, 2010 11:59
Productive capacity or productive output ?
The costless Tout
written by bobbyp, August 16, 2010 12:02
Dean, Dean, Dean....electrons are virtually free. Assigning a high cost to wasting them is as useful as kicking Schroedinger's cat.
...
written by vorpal, August 16, 2010 12:05
"NYT Kills Electrons".

I have no idea what this phrase is supposed to mean. I would love to hear your explanation, Dean. ;-)
...
written by Sam, August 16, 2010 12:34
economics is hard
written by Philip Crawford, August 16, 2010 9:19
So if China allowed the value of its currency to rise it would have no affect on exports and thus GDP?

GDP as a measure of the "size of an economy" is just plain silly. You economists know this, right?

Right?
Give the electrons a rest
written by skeptonomist, August 16, 2010 2:26
The NYT does not kill electrons, but when electrons are forced to run around they burn fossil fuels:

http://motherjones.com/blue-marble/2010/08/are-email-attachments-bad-environment
...
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What a waste of entropy.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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