Chapter 2. On Trade Surplus from Property Rights 35
3.3 Advantages and Limitations of the PPP
For a long time, economists have known the problems and disad- vantages of the PPP and have been searching for a more reasonable statistical method. Economists based at the World Bank are com- mitted to developing the PPP. Since 1995, the annual report of the World Bank has released two sets of data at the same time, namely, the GDPs calculated using the Atlas method and those derived using the PPP.
The principle of the PPP is simple, that is, the same quantity of products must have the same values. In other words, the same price
68 From Trade Surplus to the Dispute over the Exchange Rate
must be used for the products and services of different countries in the estimate of the GDP. The PPP reflects the quantity of products or services people can buy with the same amount of dollar.
The Atlas method focuses on international trade, whereas the PPP focuses on the living standard of the residents.
When estimating the GDP, the public pays more attention to the living standard than the trade. The nominal income does not matter extensively. The important thing is to determine how many things it can buy. For example, Country A has a GDP that is twice as much as that of Country B but has a high price level so the people will have to spend twice as much in buying the same group of commodities.
Therefore, the people in these two countries share the same material conditions and the same actual living standard. For instance, people spend $1 in buying a hamburger in New York but $3 when buying one in Tokyo. In terms of the hamburger, the purchasing power of
$1 is three times higher in New York than in Tokyo. Tourists cannot equate eating one hamburger in New York to eating three in Tokyo because they spend three times as much in Tokyo. With the PPP, if one hamburger is sold at $1, it should also be the same in Tokyo. The quantity of hamburgers (regardless of whether it is bought in New York or Tokyo) times the price in New York is the value calculated using the PPP.
The UN has an international comparison project (ICP) that designs a set of statistical methods for the use of the PPP. This project classifies commodities into 151 categories, including more than 500 core commodities and more than 2,000 representative com- modities. According to the rules, the PPP of different categories of commodities is calculated first. Afterward, the shares of the con- sumption of different commodities in the total economic value are taken as the weights to calculate the sum of the weighted averages, which is the PPP of the GDPs of different countries. The PPP avoids the influence caused by the exchange rate conversion and the rela- tive price variance. It more accurately reflects the economic strength and the living standard of the people in a country. The number of countries participating in the ICP of the UN Statistical Commission has increased from the initial 10 to 86.
Interpreting the Economic Scale of China 69
However, using the PPP poses many problems, and practicing it is difficult. Among so many commodities in the world, which should be included into the statistics and which should be excluded? In other words, the means through which the statistical basket should be selected has always been a problem. The selection of different combinations of commodities is likely to affect the statistical result.
Usually, people tend to select the best-selling commodities in the past few years as the statistical objects. The consumption of residents varies widely between developed and developing countries. For exam- ple, food consumption accounts for only a small part in developed countries, whereas people in developing countries spend most of their income in food expenditure. Food in developing countries is cheaper than that in developed countries; thus, the calculation of the GDP with a fixed basket of commodities is likely to underestimate the total output of developing countries. To calculate the PPP, the prices of many commodities and the statistics of consumption are necessary.
However, collecting these data in large countries, such as China, is difficult. With different brands and qualities, the commodities must be sold at different prices. The regional price variance issue is sim- ple for small countries, but in large countries such as China, even the same commodity is sold at different prices in different places.
Moreover, the planned price controlled by the country still exists in many fields, and the phenomenon of price distortion has not been eradicated, making the calculation of the PPP difficult. The lack of a unified market price results in many problems in computing the purchasing power and considerably limits the application of the PPP.
In recent years, many economists and research institutions have used the PPP to estimate the GDP of China. However, because of the different commodity samples, reference data, and methods, the conclusions are different as well. The highest estimate is one time higher than the lowest one. According to the general rule, people become very dissatisfied with the accuracy of the statistical meth- ods if the conclusions vary by 10%. In statistical terms, such a sub- stantial statistical variance causes the reliability of the data to be questionable.
70 From Trade Surplus to the Dispute over the Exchange Rate
The UN has not officially recommended the PPP because of these problems. “The results of the first-level international comparison pro- grams in the world have been applied neither for the assessments in the scope of the UN nor for the distribution of preferential loans by the World Bank. The UN Statistical Commission’s position in the recent conferences is: the results of the first-level international com- parison programs will not be used for the administrative purposes.”1 In the foreseeable future, reaching agreement on the statistical clas- sification and the prices of commodities and services will be difficult using the PPP. Therefore, the GDPs calculated using the PPP in the development report of the World Bank simply serve as reference.
As the UN and the World Bank release two sets of the GDPs at the same time, any set of data is reasonable. However, Prof. Perkins has stressed repeatedly that the international comparison must be conducted with the same statistical method instead of adopting the Atlas method for several countries and the PPP for others. Other- wise, the comparison will be meaningless.