In this video we’ll explore how purchasing power parity can be used to compare living
standards between countries.
By looking at the real GDP of two of the world’s largest economies, the importance of PPP will
become increasingly clear.
First, some facts.
I’ve pulled this data from the World Bank website using a very cool data tool they have
that I’ll share the link for below.
The United States 2019 GDP was approximately $21.37 trillion.
This made it the world’s largest economy as measured by real GDP in 2019.
By contrast, China had a real GDP of about $14.34 trillion dollars in 2019.
Their currency is the renminbi and the average exchange rate in 2019 was approximately 1
US dollar to 6.9 renminbi.
This is not the end of the argument because we now have to consider the purchasing power
of $21.37 trillion in the US and $14.34 trillion in China.
$14.34 trillion buys a lot more goods and services in China than it does in the United
States.
If we adjust for PPP, China’s real GDP in 2019 was approximately $22.53 trillion.
That means, the amount of goods and services that $14.34 trillion could buy in China is
equivalent to what $22.53 trillion could buy.
Speaking from experience, I can tell you that the same dollar spent in US and China will
give you a significantly different outcome.
Having lived in both China and the US, I’ve seen the price differentials up close.
For those of you that don’t know, I am currently based in China as of 2020 and have lived here
for 9 years now.
I have compared the prices of different commonly purchased items against what I’ve paid in
the US and I can say with absolute certainty that the majority of day-to-day expenses are
cheaper in China.
For example, I pay about 68 RMB for a haircut while my cost when I’m traveling in the
US is about $20.
The Chinese price equates to around 10-11 dollars depending on how the exchange rate
has fluctuated.
When I take the subway I pay between 2 to 5 RMB, which is about 30 to 40 cents.
In New York City, subway fares are at least $2.75.
Taxis are a similar story.
They’re quite cheap here and a local 10-minute ride should cost me about 2 dollars in the
Chinese version of Uber, called Didi.
Similar rides in an Uber taxi would cost me about 8 dollars stateside.
Many groceries are cheaper, however less common items such as cheese are more expensive.
My monthly utilities for gas, electric, water and my mobile phone are far cheaper than what
they would cost in the US.
My current mobile plan for example costs about 15 dollars a month in China whereas my American
counterparts are paying around 40-50 dollars a month at the minimum.
So you can see the same amount of money tends to go further in China which explains why
the adjustment for purchasing power parity makes sense when trying to compare living
standards.
Taking this analysis a step further, we should look at the per capita results as well.
With a much smaller population than China with 331 million people, the US real GDP adjusted
for PPP per capita is greater than China’s.
China’s population of 1.39 billion results in its real GDP adjusted for PPP placing it
much lower in global rankings.
While China may be the world’s largest economy when adjusted for PPP, it does not have the
largest real GDP adjusted for PPP per capita.
In 2019, that designation belonged to Luxembourg, followed by Singapore second and Qatar third.
The US placed 8th and China was 78th.
These statistics are according to World Bank data from the same year.
Having learned about purchasing power parity before and now applying it to the material
living standards in countries, you should have a better understanding of how economies
can be compared.
If you have any questions or comments, leave them below and we can discuss them together.
That’s us done for now and I will see you in the next one!