According to the Financial Times, China's GDP surpassed the United States to become the world's largest economy under the calculation of the purchasing power parity index. The purchasing power parity index is a new statistical rule that no longer translates the size of the economy according to the exchange rate, but on the actual purchasing power of a basket of goods within the borders of the two countries. This approach excludes exchange rate fluctuations and focuses on differences in real purchasing power between currencies.
However, are these new statistical rules more scientific than the traditional exchange rate method?We can think about it from the following aspects.
Commodities** are an important consideration when calculating the PPP index. However, goods and services from international markets often have an impact on goods within countries**. For example, when Chinese oil importers negotiate with countries such as Saudi Arabia and Iraq, will they pay for oil imports at the ratio of purchasing power parity?Similarly, do Chinese importers buy goods from other countries at a ratio of purchasing power parity?Obviously, this is not realistic.
The calculation of the purchasing power parity index takes into account a basket of goods of the same or similar quality. However, in the real world, the measurement criteria for goods and services are not the same in different countries, which increases the ambiguity of choice. Moreover, how to make a scientific comparison between different types and different qualities of goods?This is an issue that economists across the country have been unable to agree on, and there are uncertainties in the measurement of data.
As a country with a large population, there are great differences in the level of economic development and the degree of price fluctuations in different regions. Therefore, it is difficult for a single purchasing power parity index to accurately reflect the real purchasing power of various regions in China. We can learn from the practice of the euro area, and use each province as an independent unit to obtain the actual purchasing power conversion factor within each province, so as to calculate the size of China's economy more scientifically.
When formulating the relevant rules for purchasing power parity indices, developed economies are often used as references, and there are certain limitations on the representation of developing countries such as China, India, Brazil, etc. Tsinghua University has criticized the purchasing power parity rule as overestimating the size of developing countries' economies. As a result, PPP indices are not universally accepted by the international community and are only regarded as a reference in academia in many countries and are not well reported.
The PPP methodology provides a new perspective when calculating the size of economies, eliminating exchange rate interference. However, there are still some problems with this approach, such as fluctuations in commodities**, differences in the quality of commodities, regional differences in prices, and representation of developing countries. Therefore, when calculating economies of scale, it is still necessary to consider a variety of factors to provide more accurate and comprehensive data.
In conclusion, the PPP index, as a method of calculating the size of an economy, can to some extent more accurately reflect the differences in real purchasing power across countries. However, it still has some limitations and uncertainties. Therefore, when making international economic comparisons, we need to use a combination of different methods and indicators to draw more comprehensive and objective conclusions.