L1-China&39;s Economic Conditions(7)

Several economists have concluded that productivity gains (i.e., increases in efficiencyin which inputs are used) were another major factor in China’s rapid economic growth. Theimprovements to productivity were caused largely by a reallocation of resources to moreproductive uses, especially in sectors that were formerly heavily controlled by the centralgovernment, such as agriculture, trade, and services. For example, agricultural reformsboosted production, freeing workers to pursue employment in the more productivemanufacturing sector. China’s decentralization of the economy led to the rise of nonstateenterprises, which tended to pursue more productive activities than the centrally controlledSOEs. Additionally, a greater share of the economy (mainly the export sector) was exposedto competitive forces. Local and provincial governments were allowed to establish andoperate various enterprises on market principles, without interference from the centralgovernment. In addition, foreign direct investment (FDI) in China brought with it newtechnology and processes that boosted efficiency.

Measuring the Size of China’s Economy

The actual size of the China’s economy has been a subject of extensive debate amongeconomists. Measured in U.S. dollars using nominal exchange rates, China’s GDP in 2005is estimated at about $1.9 trillion; its per capita GDP (a commonly used living-standardsmeasurement) was $1,460. Such data would indicate that China’s economy and livingstandards are significantly lower than those of the United States and Japan, respectivelyconsidered to be the number-one and number-two largest economies (see Table 2).Many economists, however, contend that using nominal exchange rates to convertChinese data into U.S. dollars substantially underestimates the size of China’s economy.This is because prices in China for many goods and services are significantly lower thanthose in the United States and other developed countries. Economists have attempted tofactor in these price differentials by using a purchasing power parity (PPP) measurement,which attempts to convert foreign currencies into U.S. dollars on the basis of the actualpurchasing power of such currency (based on surveys of the prices of various goods andservices) in each respective country. This PPP exchange rate is then used to convert foreigneconomic data in national currencies into U.S. dollars.

Because prices for many goods and services are significantly lower in China than in theUnited States and other developed countries (while prices in Japan are higher), the PPPexchange rate raises the estimated size of Chinese economy from $1.9 trillion (nominaldollars) to $8.1 trillion (PPP dollars), significantly larger than Japan’s GDP in PPPs ($4.0trillion), and about 65% the size of the U.S. economy. PPP data also raise China’s per capitaGDP to $6,210.2 The PPP figures indicate that while the size of China’s economy issubstantial, its living standards fall far below those of the U.S. and Japan. China’s per capitaGDP on a PPP basis is only 14.7% of U.S. levels. Thus, even if China’s GDP were toovertake that of the United States in the next decade or two, its living standards wouldremain substantially below those of the United States for many years to come.

2

These data are estimates from the Economist Intelligence Unit and were made before China’sJanuary 2006 revisions to its GDP data (discussed on page 2).