In the article "Sorry America, China's economy is bigger than yours", the possibility of measuring the size of China's economy by the purchasing power parity index is mentioned. The purchasing power parity index (PPP) is a new statistical method that recalculates countries' GDP by using the difference in the amount paid for a basket of goods within China and the United States as a conversion factor, discarding the influence of market exchange rates. According to the data released by the World Bank, the conversion factor between the yuan and the US dollar in 2022 is 399, i.e., you need to pay 399 yuan to buy a basket of goods and services in China, and 100 dollars in the United States. Under this new statistical rule, China's economy will surpass that of the United States and become the world's largest economy.
However, is this new statistical method really more accurate than the exchange rate method?It's a worthwhile question. This article will re-evaluate the PPP index from different perspectives and the possible problems and limitations of its practical application.
1. Scientific issues of statistical rules
The purchasing power parity index (PPP) dispenses with the interference of market exchange rates and pays more attention to the conversion factors between the real purchasing power of currencies within countries. The advantage of this approach is that it can more accurately reflect the actual size of each country's economy and avoid errors caused by exchange rate fluctuations. However, this also raises some questions. First of all, the goods and services in the international market are becoming more and more integrated, and the goods between different countries are affected by the competition in the international market, and it is difficult to completely exclude them. For example, China and Saudi Arabia cannot trade according to the PPP ratio in the oil negotiations, because the oil is determined by the supply and demand relationship in the international market. Second, the quality standards of goods and services vary from country to country, resulting in incomparable data. The same basket of goods, different countries have different quality standards, how to make scientific comparisons is still a challenge.
2. The problem of regional differences
As a country with a vast territory and a large population, there are great differences in the level of economic development and the price level of various regions. In the calculation of the purchasing power parity index, only the national average may be taken into account by taking into account the differences between regions. Therefore, China can learn from the method of the euro area, and count each province as an independent unit to obtain a more scientific purchasing power index of each region.
3. The particularity of developing countries
In the process of formulating the purchasing power parity index, the characteristics of the industrial structure of the developed economies were mainly taken into account, and the special circumstances of developing countries were not fully taken into account. Some researchers believe that this statistical method overestimates the size of the economies of developing countries. For example, research by Tsinghua University points to a weaker representation of developing countries and a degree of bias built into advanced economies.
The purchasing power parity index is a new statistical method that provides a more accurate measure of the size of a country's economy than the traditional exchange rate method. However, there are many problems in this approach, such as how to exclude the impact of international market competition on the world, how to solve the problem of different quality standards in different countries, and how to consider regional differences and the particularities of developing countries. Therefore, the purchasing power parity index cannot completely replace the exchange rate method, and it is necessary to comprehensively consider various factors in practical application and seek more scientific and accurate statistical methods to better reflect the economic strength of various countries.
By studying the purchasing power parity index, I realized that the measurement of the size of an economy is not just a number, but a comprehensive reflection of multiple factors. Although the exchange rate method has certain limitations, it can reflect the real state of the market, while the purchasing power parity index focuses more on the actual purchasing power of the currency. Both approaches have their applicability and limitations in their respective contexts, and there is no absolute superiority or inferiority. For a country like China, which has a vast territory and uneven development, it is more important to master a variety of statistical methods and conduct comprehensive analysis in light of the actual situation. Only in this way can we more comprehensively and accurately assess the actual size of China's economy and provide a more accurate reference for future development. I believe that in the process of continuous exploration and innovation, we can find more scientific and fair economic statistical methods and make better contributions to China's economic development.