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April 11, 2013

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We also know that:

(1) China has cheaper prices.

(2) China has a larger labor participation rate, and their hours worked are higher too.

(3) Mexico has a GDP (PPP) per capita of $15,000.

(4) Now we learn that Chinese dollar wages per hour are 19% higher than Mexican.

Surely taken all together this should mean that China's GDP (PPP) is actually closer to $20,000 or so than the $8,500 estimated by the World Bank and IMF, and that it is in fact in real terms already quite a lot bigger than the US economy?

AK: nice insight! It bears more thinking about. So, thinking as I go ...

One thing to keep in mind is that China still has huge reserves of underemployed rural labor. (See http://www.stats.gov.cn/english/newsandcomingevents/t20120120_402780233.htm.) As an empirical matter, they are not migrating quickly enough to keep nominal wages down. (The rural labor force was 61% in 2008 --- if the employment-population ratio still holds, that's down to only about 56% today.)

A second thing to keep in mind is that the nominal wages cited in the BofA report apply only to the workers available for foreign private-sector firms. Rigidities dating from the Communist period (the real Communist period, you know what I mean) keep much labor locked up at low wages. That isn't relevant to a foreign firm locating manufacturing production, but it makes extrapolating the wage figures to GDP rather hazardous.

A third thing is that much of the increase in nominal wages is due to an increase in the exchange rate and Chinese inflation. (The GDP deflator went up 53% between 2003 and 2012; the exchange rate rose 34%. Together that comes to a rise in Chinese nominal prices relative to American ones of 104%; about quarter of the wage rise.) Neither will affect GDP as measured at PPP.

A fourth thing is that the labor share of income is higher in China than in Mexico. In 2007, the labor share in China was around 42% of GDP; in Mexico, it was a rather stunning 28%. (Low labor shares have been long features of Latin American economies.)

Add those things up (the third is likely most important) and I think the official estimations of China's GDPC probably have it correct.

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