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Minor errors

by Colman Thu Nov 15th, 2007 at 10:41:46 AM EST

In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China's economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China's size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 per cent smaller than previously stated.

This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction. The number of people in China living below the World Bank's dollar-a-day poverty line is 300m - three times larger than currently estimated.

Why such a large revision in the estimates of China's economic condition? Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars.

The World Bank's estimates based on summary data from the late 1980s probably overstated China's PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.[...]

The new, more accurate statistics describing a smaller, poorer China strengthen this argument. The ADB's announcement also indicates that the number of dollar-a-day poor in India is closer to 800m than the current estimate of 400m.

[Carnegie Endowment]
Strangely, this comes to my attention just as Migeru and I were having an IM conversation about how nonsensical most economic measurements are.

Oh, and remember the arguments about how globalisation has lifted so many people out of poverty? Nonsense, according to this - that's 600m that were just moved back under the poverty line.


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He goes on to say that we have more time than we thought before China becomes a real threat to US hegemony.

Well, he doesn't say exactly that, but that's what I heard:

Given uncertainties about China's political and security evolution, this more moderate picture of China's economic size is reassuring. It means that the US and other developed nations have more time to engage China and interact with its fledgling institutions. There might be no better place to start than with military-to-military relations.
by Colman (colman at eurotrib.com) on Thu Nov 15th, 2007 at 10:42:53 AM EST
There might be no better place to start than with military-to-military relations.

Hopefully these relations will be off the battlefield.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Thu Nov 15th, 2007 at 10:53:54 AM EST
[ Parent ]
Please put your IM musings out here so we can all throw rotten tomatoes at macroeconomic indicators, because every time I try to see what they're made of they look very rickety to me.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Nov 15th, 2007 at 12:16:48 PM EST
[ Parent ]
Basically I've managed to convince myself that there isn't a sensible mathematical definition of "real GDP" or the "price level" (also known as "GDP deflator"). Which means you can talk about nominal GDP and about growth rates and inflation rates, but you cannot really compare real GDP across countries or across  time. And it casts serious doubts on PPP. And this is in principle, without even going into the practical difficulties of gathering real data, or the fishiness of arbitrary "baskets of goods", "hedonic pricing", and other assorted suspicious stuffnonsense.

I have hinted at it here and here. There's also Keynes:

That the units, in terms of which economists commonly work, are unsatisfactory can be illustrated by the concepts of the national dividend, the stock of real capital and the general price-level:

...

Thirdly, the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of causal analysis, which ought to be exact.

Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I hope to show, that one can get on much better without them.

The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for quantitative analysis need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgement rather than of strict calculation, which may possess significance and validity within certain limits.

But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision--such as our causal analysis requires, whether or not our knowledge of the actual values of the relevant quantities is complete or exact--is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better Queen but not a happier woman than Queen Elizabeth--a proposition not without meaning and not without interest, but unsuitable material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of our quantitative analysis.

-- John M. Keynes in The General Theory of Employment, Interest and Money

(my emphasis)

The "general price level" is the "GDP deflator".

I don't know whether Keynes was thinking about the mathematical reasons I'm thinking about, but it sounds like he knew this stuff was nonsense already.

BruceMcF:

Keynes' basic argument for working in terms of nominal amounts and employment was that the ability of a person to work as unskilled labor if need be provided a connection between various specialized and more restricted skilled labor markets in terms of their renumeration as a multiple of the wage of unskilled labor, providing a quantity that could be aggregated with greater justification than the vector of the amount produced of each and every different type of final product for sale in the economy.
And now for the IM:
Colman: Is the underlying model even faintly relevant to the real world here?
Migeru: maybe what I'm doing is reducing GDP to absurdity
Colman: That's my immediate thought. ... Not that it needs much help.
Migeru: hmm. It is king of policy right now. It might be absurd but that matters little. The thing is if REAL GDP is not a state function then you CANNOT compare it across countries or across times.
Colman: Well, that's obvious to start with. In fact, most of these sumamry statistics are incomparable.
Migeru: not obvious to economic policy makers. ... So in economics what you can measure is meaningless and hwat is meaningful is unmeasurable?
Colman: I don't know about that - though it may be true - but what is measured is not comparable. Unemployment, gdp, military spend, research spending, health spending etc.
...
Migeru: apparently keynes wanted to use only nominal GDP but I don't know why other than some qualitative statements
Colman: Because real GDP is made up? Measurement errors on top of measurement errors on top of biases. Inflation is affected by political and technical choices in what is measured, GDP is "corrected" for various factors - hedonistic pricing among them, and so on.
Migeru: well, that just makes matters even worse
Colman: Absurd on the face of it.
Migeru: my argument doesn't involve arbitrary choices of baskets, or hedonic pricing or anything like that
Colman: I know.
Migeru: so that, plus practical issues of measurement just make matters worse.
Colman: GDP is, on many levels, a shit measure of anything. That it has appalling technical problems is hardly surprising.
Migeru: but it doesn't even make mathematical sense in a perfect world.
Colman: Frankly, I think it harks back to a time when it was the best they could do. GDP is easy to measure. Or approximate. From tax records.
Migere: sure, what else is the government going to use for policy? (by way of quantitative information)
Colman: The problem is that the number is, again, only slightly meaningful. So that, all things being equal (hah!) and with a sensible choice of basket, real GDP growth tells you that your economy is producing wealth faster than it was. ... Colman: But comparing 3% for one country vs 5% for another doesn't make much sense. And comparing GDP/head is meaningless. Especially since the policy discussions generally take place on the basis of provisional figures which are then revised. And US figures (broadly) are revised down, while European figures are (broadly) revised up.
Migeru: so it's all bullshit.
Colman: The way it is used is bullshit. Like unemployment.
Migeru: I'm beginning to think economics really is not at all a quantitative subject
Colman: Well, it has severe measurement problems. Rather like doing physics with only a metre stick, and without standardised metre sticks in different countries.
Migeru: no, I think it's not rather like doing physics. At all. Or maybe it's like Aristotelian physics: with entirely the wrong concepts.


We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Nov 15th, 2007 at 02:19:23 PM EST
[ Parent ]
Well, that was worth posting. (Sorry I didn't see it immediately).

I'm not capable of following the mathematical argument, but I'll take your word. As for practical measurement... Colman mentions unemployment, but let's go straight to employment, annual hours worked, where there are different measurement tools, concepts, and calculations, making international comparisons impossible (says OECD), and don't let's go on to output, productivity...

Possibly practical decisions can be made within one country, much like a businessman who doesn't understand his balance sheet, or has reason to know it's bs anyway, can still have a canny sense of how to run his business. But it's seat-of-pants flying... And may end in a nosedive.

The pretension to accurate drawing of a universal picture seems to have taken a knock with the World Bank's China PPP announcement. But if you're right and it's Aristotelian physics, 40% or 4% yardstick error, what does it matter?

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 17th, 2007 at 02:51:55 PM EST
[ Parent ]
Possibly practical decisions can be made within one country, much like a businessman who doesn't understand his balance sheet, or has reason to know it's bs anyway, can still have a canny sense of how to run his business.

That's exactly what Keynes was saying in The General Theory...

Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary.


We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Nov 19th, 2007 at 02:45:51 AM EST
[ Parent ]
It is natural, therefore, to conclude

Does he go on to say that this natural logic is justified?

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Nov 19th, 2007 at 03:53:07 AM EST
[ Parent ]
What do you mean?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Nov 19th, 2007 at 08:21:17 AM EST
[ Parent ]
Natural doesn't tell us if Keynes finally validates that conclusion. Does he in fact conclude that such instruments are unnecessary?

(In my example, I assumed a businessman was better off understanding the balance sheet all the same...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Nov 20th, 2007 at 03:09:59 AM EST
[ Parent ]
Yes, he is concluding that (see BruceMcF's statement that Keynes worked with nominal GDP). But Keynes is very vague on the reasons why. The extended quote I gave is the entire argument as far as I can tell. So unless he developed it further in previous books, or it was "widely known" at the time that there were some problems (and what was the consensus back then?) it will be hard to figure out exactly what keynes had in mind.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Tue Nov 20th, 2007 at 03:31:03 AM EST
[ Parent ]
I thought globalization was lifting gazillions out of poverty in China and India!!!

This cannot be!

All that environmental destruction for this?

I thought PetroChina was the first Trillion dollar company by market capitalization! Doesn't a lifting tide in the China Sea lift all junks?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Thu Nov 15th, 2007 at 10:46:29 AM EST
As has been pointed out before, a rising tide is less than helpful if the bottom of your boat has a gaping hole in it.
by Colman (colman at eurotrib.com) on Thu Nov 15th, 2007 at 10:47:43 AM EST
[ Parent ]
A hundred million here, and a hundred million there, and soon you're taking about real people!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Nov 15th, 2007 at 12:01:10 PM EST
[ Parent ]
I would trus the Un on data. Youc an ahrdly beleive any GDP data.
the number of people in poverty (good clotehs...) it has been reduced indeed, first with the expansion ina griculture soem decades ago.. and now thanks to the income fromt he big cities which trickles-down through family money to some provinces (soemthing like Morocco adn Spain).

Meanwhile improvement on sanitation in rural areas (something which can not be obtained via family income nor big-city growth but only through equally distributed GDP growth plus government investment  plus rural policies) has been nonexistent....

So yes.. all that carbon to feed a little bit more people but lettign them die equally from lack of sanitary water.... adn amke soem upperclasses , uber rich classes and some kind of middle class in the big cities.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sat Nov 17th, 2007 at 05:49:47 PM EST
[ Parent ]
China's economy will turn out to be 40 per cent smaller than previously stated.

Minus 40% is not a small change!

That explains why China sticks to a yuan renminbi pegged to the dollar:

FT.com / Home UK / UK - The limits of a smaller, poorer China

For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing's eyes than in Washington's.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Thu Nov 15th, 2007 at 11:12:32 AM EST
The fun thing is the revelation cuts both ways. On the one hand, we're not "already overtaken by China" but on the other, if they have that many people still in poverty, their cheap labour pool is still large and it'll be a long time before that advantage erodes. So, outsourcing will continue apace...
by Metatone (metatone [a|t] gmail (dot) com) on Thu Nov 15th, 2007 at 11:17:44 AM EST
It also means the pressure to go for economic growth at all costs is also strong.
by Colman (colman at eurotrib.com) on Thu Nov 15th, 2007 at 11:18:55 AM EST
[ Parent ]
More mercantilism ahoy?
by Metatone (metatone [a|t] gmail (dot) com) on Thu Nov 15th, 2007 at 11:34:21 AM EST
[ Parent ]
I was thinking of their attitude to environmental costs.
by Colman (colman at eurotrib.com) on Thu Nov 15th, 2007 at 11:34:58 AM EST
[ Parent ]
Yes, that's a depressing thought.
by Metatone (metatone [a|t] gmail (dot) com) on Thu Nov 15th, 2007 at 12:24:56 PM EST
[ Parent ]
On the other hand?

China set to take global lead in renewable energy
The emerging Asian superpower is poised to surpass world solar and wind manufacturing leaders in Europe, Japan, and North America in the next three years, the Worldwatch Institute said in a new report released on Wednesday. [EurActiv.com]
by Colman (colman at eurotrib.com) on Thu Nov 15th, 2007 at 12:46:16 PM EST
[ Parent ]
Well, on the one hand, the increasing price of oil means they have to make a rush to improve indigenous power production.

The trouble is, that will not just be nuclear and renewables, but coal as well...

I do think they sort of realise that the ecology is a real threat, but that kind of "Kremlinology" is guesswork, so who knows what the leaders really think?

by Metatone (metatone [a|t] gmail (dot) com) on Thu Nov 15th, 2007 at 01:21:46 PM EST
[ Parent ]
But that has already changed. These international assessments mostly will influence the way the ranking-conscious West perceives China. China seems to be focused on doing its own thing.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Nov 15th, 2007 at 01:50:07 PM EST
[ Parent ]
is only 3 years of 11%+ growth...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Nov 15th, 2007 at 11:59:06 AM EST
[ Parent ]
12%.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Nov 15th, 2007 at 12:12:08 PM EST
[ Parent ]
11% real growth. Somehow I doubt we've been seeing that in China.
by nanne (zwaerdenmaecker@gmail.com) on Thu Nov 15th, 2007 at 12:18:44 PM EST
[ Parent ]
Er...?

If the previously-held "size of the economy" = 100, then 100-40 = 60. (The economy is "worth" 60% of what was claimed).

Unless my calculations are wrong, it takes 5 years at 11% to get back up past 100 from 60.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Nov 15th, 2007 at 12:44:35 PM EST
[ Parent ]
Ah, percentages... It takes only three years of 12% growth to gain 40%, but of course 40% of a lower number is less than 40% of a higher number... so China needs to gain 66.66% to come back to its imaginary wealth in the books of the world bank...
by nanne (zwaerdenmaecker@gmail.com) on Thu Nov 15th, 2007 at 01:50:06 PM EST
[ Parent ]
Yup.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Thu Nov 15th, 2007 at 01:52:08 PM EST
[ Parent ]
Chinese exports, and Chinese carbon emissions are probably not under-reported - so the relevant ratios (trade to GDP, and emissions per unit of GDP) look even worse than they are...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Nov 15th, 2007 at 12:00:23 PM EST
Are these all PPP-based?
by nanne (zwaerdenmaecker@gmail.com) on Thu Nov 15th, 2007 at 12:29:09 PM EST
[ Parent ]
For predicting that the Chinese and Indians won't surpass the size of the US economy under the late 21st century.

I sure am feeling smug right now. :)

Have Keyboard. Will Travel. :)

by cskendrick (cs ke nd ri c k @h ot m ail dot c om) on Thu Nov 15th, 2007 at 12:48:35 PM EST
While I was researching my Ph.D. I kept running across PPP estimates, which in the case of China were wildly divergent.  After looking into it, it seemed to me that there a few main reasons why PPP is a bad indicator:

  1. It shouldn't be used for tradeable commodities, that is, for most goods.  Most goods can be traded on an international market; PPP was set up partially to deal with services (e.g., the Turkish haircut example), so why extend it to goods?  Which leads to

  2. There is a lack of transparency as to how the World Bank (or other economists) weight goods, particularly machinery.  I remember reading (sorry, can't remember the reference) that some kinds of machine tools in Japan weren't considered for that country's PPP because the machines were too complex.  So just use the real price!  Which leads to:

  3. Even for services, we don't know the methodology.  For instance, I remember reading Angus Maddison's complaint that in one PPP calculation he saw, larger class sizes were considered more productive, and therefore given more PPP, than smaller ones!  I wouldn't trust economists to figure out either machinery or service industries.

  4. Part of the problem is supposed to be that currencies are not perfectly reflecting their prices.  But I also remember reading an article by Rogoff claiming that, in the long run, currencies pretty much trend toward their "real" price (witness the dollar).  So that argument doesn't hold up either.

So in sum, I don't trust a bunch of economists to sit at a table like some global apparatchiks deciding what prices make sense, both because they often don't have the technical knowledge to make these calls and because , at least in the case of goods, the market probably does a better job.  End of rant
by Jon Rynn (jonrynn[-at-]economicreconstruction[dot]com) on Thu Nov 15th, 2007 at 05:42:01 PM EST
Errors are what we read from the media everyday and this Carnegie/FTimes article is no different, so it´s difficult to believe anything.

The Error Salon et Klatsch?

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Fri Nov 16th, 2007 at 04:44:33 PM EST


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