Why PPP Exchange Rate Based Comparisons Matter

There is natural push back to the recent news that China will soon become the largest economy in PPP terms. As some US commentators have noted, China’s market exchange rate based GDP is still well below US GDP.

http://www.businessweek.com/articles/2014-05-01/the-u-dot-s-dot-is-big-and-rich-dot-china-is-just-big

However, when comparing rich and poor countries, it makes sense to use PPP exchange rates (as even a half way decent economist would point out).

If you think cross-country price differences don’t matter, just think about the cost of healthcare and education services in the US relative to the rest of the world. Prices of non-traded goods and services differ significantly between rich and poor countries.

The Economist provides a more nuanced analysis:

http://www.economist.com/news/finance-and-economics/21601568-new-data-suggest-chinese-economy-bigger-previously-thought-dragon

Here is an interesting piece on pharmaceutical drug prices in the US - just to highlight the enormous differences in prices across borders:

http://www.bloomberg.com/news/2014-04-30/drug-prices-defy-gravity-doubling-for-dozens-of-products.html

Earlier post on PPP:

http://vivekjayakumar.blogspot.com/2013/08/international-gdp-comparisons.html