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What is PPP GDP? Or, Why China’s Economy is Larger than the US Economy

Tell Americans that China’s economy is #1, you will get incredulous looks. Show them the chart below, most will think it’s “fake news”!

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As the words on the left of the chart show, the graph is displaying “PPP GDP.” What the heck is that? After all, we know that the US GDP is about $20.5 trillion and China’s GDP is about $13.5 trillion (by the end of 2018).

Is PPP GDP a fake metric?

Well, PPP GDP is the metric used by the World Bank, IMF and even the CIA to compare economies. If you go to CIA’s World Factbook page, you will see that China is ranked as #1 using PPP GDP (see screenshot below). Also note that China’s PPP GDP is $23 trillion, which is 10% larger than that of the USA.

gdp by cia

What is PPP GDP?

PPP stands for Purchasing Power Parity. Basically what it means is that we can’t compare economies using absolute, nominal numbers that are in US dollars. The reason is simple: A fixed number of US dollars will buy you different amount of goods and services in different countries.

In other words, you can think of it as difference in cost of living. This is very similar to comparing wages in different US cities. Who is richer — a person making $100,000 in Manhattan or a person making $75,000 in Cleveland, Ohio? Definitely the latter, who will spend a lot less on rent/mortgage and other expenses than the guy in NY City. PPP GDP is an analogous measure for countries. China can do lot more with $13 trillion than the US can with $20 trillion.

Currency fluctuations 

Another way to look at it is how the value of currencies are fixed by the global market. For example, Russia’s GDP “fell by 50%” in the last five years. But Russia’s true economic output has risen. So what happened? The value of Russian Ruble in US dollars fell by half. In 2013, you can buy 1 US dollar with 30 Rubles; and now you need 60-70 Rubles.

Here’s a little bit of nugget you won’t read in the mainstream media: Wall Street can attack any currency and make it weak.

Regarding China, its GDP is 92 trillion Yuan. How much is that in US dollars? Well, it depends on the exchange rate. If 1 USD = 6.8 Yuan, then China’s GDP = $13.5 trillion. What happens if 1 USD = 3.4 Yuan? Well, China’s GDP will double to $27 trillion! That will happen even though the total output of Chinese economy would be the same.

This is obviously ridiculous. That’s why global economists prefer the “PPP GDP”, which is also termed as “GDP in International Dollars.”

To conclude, China’s economy became #1 in 2014 and has remained so. Some mainstream media wrote about that fact back in 2014, but it never sank in America’s collective conscience.

gdp largest 2014

 

gdp 2014 bi article

It shouldn’t be shocking, really. If the average Chinese is 1/3rd as productive as the average American, China’s economy will be larger than America’s economy. And we know that the Chinese work very hard…