Two comparisons of GDP between China and the United States

In 2012, the value of all final goods and services produced by the Chinese economy, or GDP, was $8.35 trillion at market exchange rates. Given China’s population of 1.35 billion, that works out to a per capita GDP of $6,188. The U.S. GDP for the same year was nearly $16 trillion, and its per capita GDP was about $50,000. This means that China’s economy is half the size of the U.S., and its per capita GDP is 12% of that of the U.S. However, economists have long argued that this comparison, using nominal exchange rates, does not paint a true picture of actual differences in living standards. This is because many goods and services are cheaper in developing countries than in richer countries, especially those that are not traded internationally. Typical examples are haircuts, housekeeping, and restaurant meals. I lived in Beijing with my family for nine years, starting in 2004, and had a driver and a part-time housekeeper to help with our daily lives. Back in Washington, we could no longer afford these services because they were much more expensive than in China. Global prices for tradable goods, such as manufactured goods, remain similar due to international competition. For example, in 2009 we bought a popular car that cost about the same as it would in the United States.To correct for this price difference, a large data collection is conducted every six years around the world to examine how a large number of goods and services are priced in different countries and regions (the most recent collection includes data from 199 countries). The most important result of this collection is a measure of GDP per capita in each country using the purchasing power parity method, that is, at the same price level. In 2012, China’s GDP per capita in purchasing power parity was $10,960. The United States, which is the benchmark for this survey, still has a GDP per capita in purchasing power parity calculations of $50,000. Therefore, China’s real standard of living is 21% of that in the United States, rather than 12% of nominal GDP. The reason for this difference is that a dollar, converted into RMB at the market exchange rate, has more purchasing power in the Chinese market than in the United States. To put it another way, China’s price level is about 56% of that in the United States. This is the result of averaging China’s low prices with its prices that are close to or higher than those in the United States. The results of this data collection are surprising because the previous survey, in 2005, estimated China’s price level much higher than this time. The higher the price estimate, the lower the GDP per capita in terms of purchasing power parity. If the price level were the same as in the United States, there would be no difference between GDP per capita in terms of purchasing power parity and nominal GDP per capita. Many experts thought at the time that the 2005 price estimate was too high. Good data collection requires sampling across the country, and the 2005 estimate may have relied too heavily on data collected from a few more expensive cities. The new estimate is consistent with international experience. For example, in the 1980s, South Korea’s GDP per capita in terms of purchasing power parity was about 20% of that of the United States, and its price level was about 60% of that of the United States. The new price estimate for China is typical for developing countries at this stage of development. As countries continue to move toward high-income growth, service prices generally rise, and overall price levels approach or even exceed those of the United States.