Analysts Mixed on Emerging Economies Metric

    15 May, 2014


    From VOA Learning English, this is the Economics Report.

    The economies of India and China could be larger than many people have thought. A new study from the World Bank now has some experts predicting that China will become the world's largest economy by one measure this year. The same study says that India's economy could pass Japan's as the world's third-largest.

    To get their results, the researchers used a different way to measure the size of a nation's economy. Usually economists measure by a country's Gross Domestic Product - the value of all goods and services it produces. But some say, a different method, called Purchasing Power Parities, or PPP is a better measure. It examines differences in the cost of living among nations.

    Analysts Mixed on Emerging Economies Metric
    FILE - Coins, banknotes of Chinese yuan paired with a U.S. dollar during photo illustration, Fuyang, Anhui province, November 2006.

    The report is from the International Comparison Program, which was established by the United Nations. The results are based on prices in 2011.

    Kamel Mellahi is a professor at the University of Warwick in Britain. He says PPP provides economists with a way to compare the costs of ordinary things that people need in different countries.

    "You take a basket of goods that we all buy, including milk, butter, sugar, [going] to the movies, prices of haircuts in different countries, and they look at the cost of that in different countries," Mellahi said.

    Experts then establish a base exchange rate and use it to compare economies. The Gross Domestic Product measure uses market-based exchange rates to compare economies. They are exchange rates paid by travelers and exporters. So the main differences between GDP and PPP is how exchange rates are computed.

    Greg McBride is Chief Financial Analyst at He says PPP avoids some problems, but it is more like an estimate than a measurement.

    "There is a huge margin of error there that I think can really throw the validity of the whole thing into question," said McBride.

    World Bank information shows that China's GDP was about $8 trillion in 2012, that was half the size of the $16 trillion US economy. However, Professor Mellahi says the GDP measurement underestimates developing economies.

    "People always said it underestimated the size of economies in developing countries, and some of the emerging economies," Mellahi said.

    The economies of China and India continue to grow at rates higher than most developed economies. However, China and India rate far below other large economies when their economies are compared with their populations.

    And that's the Economics Report from VOA Learning English. I'm Mario Ritter.