Who Shrunk China? Puzzles in the Measurement of Real GDP

Abstract

The latest World Bank estimates of real GDP per capita for China are significantly lower than previous ones. We review possible sources of this puzzle including substitution bias in consumption, reliance on urban prices, which we estimate are higher than rural ones, and the use of an expenditure-weighted rather than an output-weighted measure of GDP. Taking all these together, we estimate that Chinese real per capita GDP was 30% higher in 2005 than the World Bank estimates. Our empirical procedures have implications more broadly for international comparisons of living standards and real GDP. ICP Asia-Pacific region. It is clear that urban bias would have impacted price data for consumption items. 4 As explained in Section 3, PWT 7.0 produced two estimates of real GDP for China: one using the 'official' ICP prices and the second using the 20% downward adjustment in prices. The same procedure is used in PWT 7.1, which differs from 7.0 based on revised national accounts data and revised prices for investment goods. PWT version 7.0 assesses the first of these reasons by providing another measure of real GDP, called 'cgdp2' and referred to as 'average GEKS-CPDW'. This calculation uses the GEKS method. For 'China version 1', per capita real GDP is $4,813 in 2005, and for 'China version 2', per capita real GDP is $5,366 in that year. Both of these estimates exceed that obtained by PWT using the GK system. Evidently, the use of GEKS by the World Bank cannot explain its low estimate for China's real GDP, which leaves the use of 'link countries'or other unknown factorsas the culprit.

The Next Generation of the Penn World Table

“…This correction is discussed further in Feenstra et al (2013). Further adjustments for biases in ICP 2005 are also made in PWT8.1, based on Inklaar and Rao (2014) and described in Feenstra, Inklaar, and Timmer (2015b).…”

Cross-Country Income Levels over Time: Did the Developing World Suddenly Become Much Richer?

“…The general consensus from Deaton and Heston (2010), Chen and Ravallion (2010a,b) and Feenstra, Ma, Neary and Rao (2013) To measure this bias, we exploit the basic structure of the country-product-dummy (CPD) model used in the ICP. 34 We specify a simple regression model that explains log prices P of product i in country j located in region r using dummies for each product, Di, each region, Dr,…”

Pro-Poor Price Trends and Inequality -- The Case of India

“…For example, the fixed basket approaches, such as the Laspeyres, the Paasche and the classical Geary method-the latter underlying the Penn World Table-fail to incorporate substitution, as the assumed consumer basket is held fixed in comparisons involving different relative price levels. A large part of the price index literature is about how to avoid this problem (Akmal and Dowrick, 2005;Diewert, 1978;Feenstra et al, 2012;Neary, 2004). In our empirical investigation, we make an effort to disentangle the biases caused by not adjusting for substitution and the biases caused by implicitly relying on homothetic preferences.…”