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PART OF THE STORY : More Hopeful Evidence That the World Is Getting Richer

Global Economics

By Charles Kenny May 05, 2014

Photograph by Frederic Soltan/Corbis

Last week, while the U.S. economy remained pretty much exactly the same size, our best estimate for the size of the rest of the global economy got a lot bigger. 

It expanded by about $10 trillion—more than a 10 percent increase. 

The estimate of the world’s gross domestic product increased about 12 percent to $91 trillion, and global GDP per head increased in proportion, to about $13,460. 

This wasn’t thanks to a Stakhanovite burst of midnight productivity by people from Tijuana to Tibet. 

Instead, statisticians who track global prices updated their data and found the rest of the world could buy goods and services for less than we thought.

That makes them richer than we thought. The adjustments are particularly large for some of the world’s poorest countries—which means there are a lot fewer people living in absolute poverty than previously estimated.

These new estimates (PDF), released by the International Comparison Project, examine how much a dollar could buy you in Bhutan, Botswana, and Bolivia, along with a hundred-plus countries in between. 

A haircut might cost $15 at Supercuts in Washington or 50 rupees in Bangalore. An orange might be 50 cents at a D.C. Whole Foods and 5 rupees in India. 

The ICP looks at what people buy and how much it costs them around the world and uses that to calculate income statistics that account for the different prices paid for the same goods and services. 

These “purchasing power parity” numbers are widely considered the best measure for comparing global incomes. The new price survey—the first since 2005—suggests we’ve been underestimating many countries’ purchasing power. And that means we’ve been underestimating their GDP, too.

The top three spots in terms of world’s largest economies didn’t change—the U.S. comes first, China second, and India third. But China and India have closed the gap. Using the old numbers, China’s 2011 GDP was 72 percent the value of U.S. GDP. Under the new numbers, it’s 87 percent. That moved up the forecast for when China will become the world’s largest economy to sometime around the end of this year. India’s 2011 GDP, meanwhile, was estimated to be 29 percent of U.S. output last Tuesday, which increased to 37 percent by Wednesday. India’s 2011 GDP per capita estimate climbed from $3,677 to $4,735.

The numbers for India and China reflect something broader: Poor countries as a whole look richer under the new numbers than they did under the old. 

Almost two-thirds of countries, home to more than three-quarters of the global population, saw their GDP estimates climb by 1 percent or more. Bangladesh’s GDP per capita estimate increased from $1,733 to $2,800, Nigeria’s from $2,485 to $3,146. Indonesia’s GDP is 85 percent larger than we previously estimated, Ghana’s is 84 percent larger, and Pakistan’s 70 percent.

Countries with income per capita under about $1,000 using market exchange rates—the traditional definition of a low-income economy—saw an average GDP increase of about 35 percent. Countries with incomes per head above $1,000 but below $13,000 using market exchange rates—a little above the traditional high-income threshold—saw an average GDP increase of about 27 percent. The remaining rich countries only increased in size by about 2 percent thanks to the revisions—many saw their purchasing power estimates go completely unchanged. That includes the U.S., because what the dollar can buy in the U.S. acts as a benchmark for the purchasing power calculations.

Because the revisions were largest in the world’s poorest countries, the new purchasing power numbers had a particularly dramatic impact on indicators of global poverty. Estimates made by the Center for Global Development suggest that the number of people in the developing world living below $1.25—the international absolute poverty line—fell from more than 1 billion to about 600 million as a result of the revisions. The number of absolute poor in India in 2010 was thought to be around 396 million people on Tuesday; by Wednesday a better estimate was 148 million. The number of poor people in Nigeria went from 88 million to 60 million.

It’s debatable what the new purchasing power numbers should mean for estimates of growth over the last few years. But using the preferred Penn World Tables approach, the purchasing power revisions are likely to suggest the developing world has been growing faster than we thought since 2005. The last 10 years already saw global convergence using the old income data—in other words, poor countries have been growing faster than rich ones for the first time in decades. That this trend is probably even more pronounced than we’d assumed is particularly impressive.

But for all the good news for the global economy in this data, it’s worth noting what the new numbers don’t mean. 

They mean nothing for global trade and finance–because international transactions are carried out using market exchange rates, not “purchasing power.”

China was already the world’s largest trading nation, for example, but last week’s revisions didn’t extend its lead over the U.S.

And no one in China—or anywhere else in the developing world—saw their lives change on Tuesday just because of an international statistical correction. 

The number of children who die before their fifth birthday, the number of people who lack the resources to provide adequate shelter, warmth, and nutrition for their families, levels of local and global pollution—all remained exactly the same. 

There are still some global problems that even statisticians can’t fix.

STORY: An Immodest Proposal: A Global Tax on the Superrich

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