GDP Has Limitations Based On PPP.

PPP theory is the famous exchange rate decision theory put forward by Gustav Cassel, a Swedish economist in early twentieth Century.

Purchasing power parity means that the exchange rate between two currencies depends on the ratio of purchasing power of their unit currencies.

PPP theory holds that foreigners need foreign currencies because they have purchasing power in foreign markets and can buy goods and services produced by foreigners. Foreigners need their currencies because they have purchasing power in their domestic markets and can buy goods and services produced by their own people.

Therefore, the exchange rate of the two currencies is determined by the respective purchasing power ratios of the two currencies.

The theory of purchasing power is based on the fact that the same commodity in the world is equivalent under free trade. It assumes that the flow of goods and services is not influenced by factors such as tariffs and quotas, nor does it take account of the differences of goods in different countries.

IMF uses PPP as currency conversion coefficient to pform a country's GDP into a GDP represented by a benchmark currency.

IMF based on this conversion coefficient and the determination of GDP based on this conversion coefficient is based on the International Comparison Program (ICP).

ICP is a cross country comparison system chaired by the United Nations Statistical Commission and the world bank. It aims to provide the internationally agreed price and quantity of GDP and its components.

It calculates the real ratio of the purchasing power of different countries through the price survey and the GDP calculated by the expenditure method.

ICP conducts a survey every six years to collect information on the expenditure and prices of final products (including consumer goods, consumer services, government services and capital goods) in order to calculate PPP.

The PPP meaning of ICP is, for example, how many units of a country's domestic currency are needed to purchase goods and services that are comparable to a basket in a common currency.

In general, PPP is equivalent to the exchange rate of domestic currency and the US dollar having equal purchasing power.

ICP provides PPP for the base year (the latest base year is 2011). In addition to other years beyond the base year, IMF follows the standard method, using the relative inflation rate based on GDP reduction index, extrapolating PPP from other years, and calculates the comparable GDP for each country.

Through the data released by IMF, we can compare the GDP calculated by purchasing power parity between China and the United States and GDP based on market exchange rate. We can see that the difference between the two methods is quite different.

In 2014, China's GDP based on purchasing power parity will exceed US $200 billion for the first time, reaching US $17 trillion and 630 billion.

Over the same period, China's GDP based on market exchange rate is estimated at $10 trillion and 360 billion, far below the US $17 trillion and 420 billion.

Judging from the reasonableness of the purchasing power parity, the market exchange rate is short term volatility, which is easy to be influenced by international speculation and government intervention. Therefore, the international comparison based on market exchange rate may be unstable or even misleading.

Using the market exchange rate to compare the total economic volume of a developing country with a high-income country, the economy of developing countries is usually underestimated.

There are two main reasons for this: first, some basic non tradable products and services are usually cheaper in developing countries, such as food and medical care, whose prices are determined in the local market rather than in the international market; two, because of liquidity or other risk factors, the exchange rate of currencies in developing countries is usually underestimated.

The purchasing power parity method can be used to compare the actual purchasing power of output and residents in different countries.

However, the statistics of purchasing power parity are limited.

The calculation method of purchasing power parity in ICP is based on the price survey of various countries, first compares the price contrast of each commodity, that is, the PPP of a single commodity; then, by using a specific method, it calculates the price contrast of the same basic commodity, that is, the basic class PPP; finally, by using a specific method, it synthesizes the PPP of the basic commodities to form a comprehensive PPP.

The calculation method of basic class PPP and comprehensive class PPP is very complicated, and the calculation results are very sensitive to the choice of these methods.

In addition, the difference between purchasing power parity in goods and services and the difference in quality can not be reflected.

In general, purchasing power parity is more suitable for comparison among countries with similar economic development level.

It should be pointed out that purchasing power parity reflects the actual living standard of the residents rather than the overall strength of the country.

The general consensus in academia is that the actual GDP per capita based on PPP is the best criterion for determining the productivity of a country.

Purchasing power parity can more accurately reflect the amount of goods and services that residents can actually buy.

Therefore, it is reasonable to compare the actual living standard of the two countries with purchasing power parity, but it is misleading to compare the actual scale of the two countries' economies.

Derek Sithers, an economist at the American Enterprise Institute, even thinks that comparing the total amount of GDP with purchasing power parity at any time point and any country is of little significance.

Parity reflects domestic purchasing power rather than international purchasing power.

The study shows that market exchange rate is vulnerable to short-term shocks and often deviates from the PPP exchange rate, and in the long run, the rate of convergence of market exchange rate to PPP exchange rate is relatively slow.

In the process of trade exchange between countries and countries, the market exchange rate is used.

In contrast, the purchasing power of a country depends more on the market exchange rate.

In addition, the developing countries, based on purchasing power, have high GDP products and services, such as food and medical care, which are mostly non tradable products and can not be converted into international competitiveness.

Farewell to "GDP theory"

China's economy has been developing at a high speed, but it still faces such problems as weak foundation, low quality of development and uneven development. We need to rationally and objectively view "China surpasses the United States to become the world's largest economy."

PPP is a method of country comparison. This method has certain limitations, and can not accurately reflect the comparison of the comprehensive strength of the two countries. It needs to correctly understand and judge the current development stage in China, take the goal of improving the comprehensive national strength as the goal, pform the GDP oriented thought, design and put forward scientific government assessment system as soon as possible, and effectively improve the quality of economic growth and the living standard of the people.

First, we should not only look at the increment, but also look at the stock.

GDP is the sum of goods and services created in China over a period of time, and it is the concept of increment.

The prosperity of the country and the prosperity of the people need many years of accumulation.

Compared with the wealth accumulation of nearly 100 years in Europe and the United States, the scale of GDP in one year surpasses that of the United States. It can not prove that China's economy has surpassed the US. Especially, this "pcendence" is only reflected in the calculation method of PPP.

Second, it depends on both the total and the per capita.

China's per capita output is still relatively low.

By comparing the per capita GDP of China, the United States, Germany, Japan, Russia and India, we can see that China's per capita GDP is only higher than that of India.

On the one hand, the low per capita GDP reflects that our labor productivity is not high, and on the other hand, it reflects that the absolute value of people's living standard is still low.

Third, we should not only look at the increments, but also the quality.

Only incremental and no quality can only bring low level of redundant construction, resulting in a lot of waste of resources, and can not form effective accumulation of wealth.

For a long time, China's economic growth has been dependent on extensive consumption of resources, low technology and low return on capital investment.

The irrational economic structure, the unbalanced development of urban and rural areas and regional development have restricted the next step of economic development.

Countries and enterprises are big but not strong, and their international competitiveness and influence are far from that of developed countries.

Fourth, we must look at the economy as well as the society.

The rapid development of the economy has brought serious environmental problems. The environmental load has reached the limit. Air pollution, water pollution and soil pollution control are urgent.

The level of legal system construction, government governance mechanism and social management system is still relatively backward, and the process of reform and improvement still needs a certain process.

Fifthly, we should look both at home and abroad.

GDP is the sum of domestic goods and services in a certain period. GDP reflects productive capacity. Gross national income (GNI) is the sum of residents' income in a certain period, reflecting the prosperity of the nation.

GNI in Brazil, China and Russia is slightly lower than GDP, while GNI in Germany, Japan and the United States is higher than GDP.

This is consistent with the fact that developing countries are capital importing countries and developed countries are capital exporting countries.

China's per capita GDP level has reached the conditions for capital export, and the new system of open economy is being constructed. The capacity and mechanism of capital export will be greatly strengthened, and the degree of integration into the global economy will continue to increase. The focus of future attention may need to shift from GDP to GNI.