I plan to make two points in this post:
1. It’s important to use PPP adjusted data.
2. PPP adjusted data is not always reliable.
Yes, there’s a conflict. But real life is messy.
I recently traveled to China, and that got me thinking about PPP estimates of GDP/person. Here is some data from the IMF (for 2023):
US: Nominal = $80,412 PPP adjusted = $80,412 (by definition)
Austria: Nominal $58,013 PPP adjusted = $69,069
Japan: Nominal = $33,950 PPP adjusted = $52,120
Taiwan: Nominal = $32,339 PPP adjusted = $72,485
Chile: Nominal = $17,254 PPP adjusted = $29,935
China: Nominal $12,541 PPP adjusted = $23,309
Recall my recent post where I argued that Japan’s economic performance has been somewhat disappointing. If we used nominal figures, we’d conclude that it’s been an unmitigated disaster. In 1995, Japan’s per capita nominal GDP was more than 50% higher than that of the US ($44,198 vs. $28,658. Now it’s well below half the US level. I’m not saying that doesn’t matter at all (it may explain the decline in Japanese tourism), but surely it’s not an adequate measure of Japan’s overall position relative to the US.
I’ve been to all of these places in recent years, and for the most part the PPP figures seem to be in the right ballpark. But there’s one exception. Taiwan’s PPP adjustment seems way too large.
I’m not trying to dump on Taiwan. Over at Econlog I recently praised Taiwan, which certainly has a highly successful economy. But Taiwan doesn’t seem even close to Austria in living standards. More like Japan (at best.)
Taken at face value, the IMF is claiming that Taiwan has a far lower price level than mainland China. I recently spent three weeks in China, and then stopped in Taiwan for three days on the way home. My initial reaction was that Taiwan seemed far more expensive than the mainland (albeit considerably cheaper than the US.) An hour long taxi ride to the Beijing airport costs about $15, whereas the roughly equal ride from the Taiwan airport to our hotel was about $45. Food was also more expensive in Taipei. My wife bought the same meat filled pancake that cost 80 cents in Beijing for $2 in Taipei.
Those are just anecdotes, but service prices tend to reflect wages, and wages are obviously much higher in Taiwan than in Mainland China. I can’t even imagine which goods are so cheap in Taiwan that they could explain the IMF finding the overall Taiwanese cost of living to be far lower than the mainland. Manufactured goods like cars are also really inexpensive in China. What am I missing?
In contrast, China’s upward adjustment might be a bit too small. China seemed far cheaper than all of the other countries on the list.
So PPP adjustments are far from perfect. Even so, using nominal GDP/person figures leads to nonsense, like the claim that Japan is in the midst of a Great Depression.
Here’s the FT:
After stagnating under Mao Zedong in the 1960s and 70s, China opened to the world in the 1980s — and took off in subsequent decades. Its share of the global economy rose nearly tenfold from below 2 per cent in 1990 to 18.4 per cent in 2021. No nation had ever risen so far, so fast.
Then the reversal began. In 2022, China’s share of the world economy shrank a bit. This year it will shrink more significantly, to 17 per cent. That two-year drop of 1.4 per cent is the largest since the 1960s.
These numbers are in “nominal” dollar terms — unadjusted for inflation — the measure that most accurately captures a nation’s relative economic strength.
Define “economic strength”. BTW, that’s a clumsy way to define nominal share of global economy. Instead of saying “unadjusted for inflation”, the FT should have said “at current exchange rates.”
PS. If I had no access to the IMF data and was told the US GDP/person was $80,000, I would have guessed (PPP adjusted) $75,000 for Austria, $60,000 for Japan, $55,000 for Taiwan, $30,000 for Chile and $26,000 for China. So Taiwan is the one where I’d be way off.
PPS. Yes, RGDP doesn’t exactly equate to living standards (which reflect consumption), but Taiwanese investment is 25.9% of GDP, only slightly above the 24.2% ratio in Austria. A slightly higher investment ratio cannot explain the size of the anomaly. Taiwan’s PPP adjustment is too large.