metadata: authors: 0: author: Ruoen, Ren
1: author: Chen Kai
count: China
docna: 0: docna: China's GDP in U.S. dollars based on
            purchasing power parity
docty: Policy Research Working Paper
subtopic: Urban Housing and Land Settlements,Health Care Services Industry,Labor Markets,Urban Governance and Management,Urban Housing,Educational Sciences,Educational Institutions & Facilities,Effective Schools and Teachers,Municipal Management and Reform
teratopic: Health, Nutrition and Population
abstracts: cdata!: China's gross domestic product per
            capita was only US$300 to $370 in 1980-91 in an estimate
            based on the World Bank Atlas approach used in the World
            Development Report. These estimates fail to capture the fact
            that in the 10 years since embarking on a program of
            economic reform aimed at rapid economic development, China
            has been one of the fastest growing economies in the world.
            Knowing what its true standard of living and productive
            potential is important not only for measuring the size of
            China's economy but for assessing its growth
            performance. The authors provide a detailed comparison of
            the GDP of China and the United States using the purchasing
            power parity approach formulated by the U.N. International
            Comparison Program (ICP), with 1986 as a base. Using this
            approach, which establishes a conversion factor based on
            prices for comparable items rather than on exchange rates,
            they find that: 1) China's per capita GDP in 1986
            international dollars in between $770 and $1,044, depending
            on assumptions made about comparison-resistant service
            sectors and quality adjustments made in a number of selected
            ones in calculating purchasing power parities; and 2)
            China's per capita GDP in 1991 international dollars is
            between $1,227 and $1,663, allowing for the impact of
            inflation in the United States on the purchasing power
            parity and growth rates in China computed from national
            currency GDP data in constant prices.
geo_reg_key: 517198,119225,517191
repnme: repnme: China's GDP in U.S. dollars based on
            purchasing power parity
display_title: China's GDP in U.S. dollars
            based on purchasing power parity
listing_relative_url: /research/1995/01/697717/chinas-gdp-dollars-based-purchasing-power-parity
topicv3: Teachers Management m1326119 1523,Education m1327048 470,Land and Housing m1327648 817,Nurses and Midwives m1504316 3588,Health m1504661 3480
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Health, Nutrition and Population
origu: Socio-Economic Data Division
no_of_pages: 54
model_extractions: ## POLICY RESEARCH WORKING PAPER 1415

# Summary findings

China's gross domestic product per capita was only US$300 to $370 in 1980-91 in an estimate based on the World Bank Atlas approach used in the _World Development Report._ These estimates fail to capture the fact that in the 10 years since embarking on a program of economic reform aimed at rapid economic developmnent, China has been one of the fastest growing economies in the world. Knowing what its true standard of living and productive potential is important iaot only for measuring the size of China's economy but for assessing its growth performance.

Ruoen and Kai provide a detailed comparison of the GDP of China and the United States using the purchasing power parity approach formulated by the U.N.

International Comparison Program (ICP), with 1986 as a base. Using this approach, which establishes a conversion factor based on prices for comparable items rather than on exchange rates, they find that:

> * China's per capita GDP in 1986 international dollars is between $770 and $1,044, depending on assumptions made about comparison-resistant service sectors and quality adjustments made in a number of selected ones in calculating purchasing power parities.

* China's per capita GDP in 1991 international dollars is between $1,227 and $1,663, allowing for the impact of inflation in the United States on the purchasing power parity and growth rates in China computed from national currency GDP data in constant prices.

- - This paper a product of the Socio-Economic Data Division, International Economics Dcpartment is part of a larger effort in the departmcnt to cxpand coverage for purchasing power parity-based estimates to most countries of the world. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Elfrida O'RiellyCampbell, room S7-136, extension 33707 (46 pages). January 1995.

_The Policy Resare WorkiNg Paper Seris dissemina_ **_t_** _es he fdings of uork ai progress to ncoge the exuchng of deas about dc pment sses. An obective of the seriei_ **_s_** _to get the findmgs out quicy. even if the presentations are kss than lly polishae The papes cany the names of the autors andshould be used and sitd accordingly. The findings_ **_anterpretations._** _and conclusions are the autors' own and should not be atributed to the World Bank. it Executive Board oflDirectors_ or _any of its member countries._ Produced by the Policy Research Dissemination Center
# AN EXPENDITURE-BASED BiLATERAL COMPARISON OF GROSS DOMESTIC PRODUCT BETWEEN CHINA AND **THE** UNITED STATES

<!-- Start of picture text --> by<br><!-- End of picture text --> <!-- Start of picture text --> Ren Ruoen<br>School of Busin Management<br>B.AA University<br>Beijing, China<br>and<br>Chen Ki<br>Econonic Deveopment Cnter<br>Ministry of Posts and Telecommnunications<br>Beijing, China<br><!-- End of picture text --> This revised and updated version of an earlier paper sponsored by the National Natural Science Foundation of China has benefited from guidance that Ren Ruoen received especially from Professor Stanley Fischer of Massachusetts Institute of Technology, where he was a visiting scholar in 1991-92, and from colleagues at the World Bank, where he was a consultant at the Socio-Economic Data Division of the International Economics Department during 1992-93. Responsibility for the paper rests entirely with the authors. Data used in this study can be made available at special request.
# Table of Contents

|Sum|mary<br>..|ini|
|---|---|---|
|Ack|nowledgments<br>..|iv|
|I.|Introduction .1||
|IH.|A Retrospective of Estimating Chinese Real Income<br>.3||
|ml.|Outine ofBilaterl Compaison Methods<br>.9||
|IV.|Bilateral Comparison Between China and the United States .13||
||1. Collecting and Processing of Data .13||
||2. Matching of Quality .15||
||3. Some Topics in the Bilateral Comparison .16||
|V.|Results of the Bilateral Conpaison .25||
|VI.|Analysis of Errors .28||
|VII.|Concluding Remarks .32||
|Anne|x:||
||Table 1. The Distribution of Sample Data .34||
||Table 2. Estimates of Shadow Rents in China .35||
||Table 3. Estimating Rent in US .35||
||<br>Table 4. Results of Bilateral GDP Comparisons .36||
||<br>Table_5._The Weights Used in the Esimation .37||
||Table 6. List of Items in the Sample ofPmice Retives .38||
|Refer|ences .....|42|

i
# **SUMMARY**

_This pqper presents a detwled bilateral comparison of GDP between China and the United States with 1986 as a reference date, following the purasing power parity (PPP) appoach formulated by the United Nations International Companson Program (ICP). The finings of the study include the following._

- _(a) China's per capita GDP in 1986 international dollars is between 1S770-1,044, depending on the different assumptions made in the compaiso of comprisonresiskant service sectors and the quality adjustments made in dte calculation of PPPs in a number of selected are_

- _(b) Based on the impact of iflation in the United Staes on ihe pardzsing power panty and grwth rates computedfmm national carency GDP data in consat price for China China's per capita GDP in 1991 irderntional dollars hows out to be between 1 1,227-1,663._

_The specffic issues in the comarisons of the housing and dte compisn-isisant rwice categories are dsused and some pproaches like te estimation of the shadow rent are tried The possible errors in the bilatera comparisons are analyzed_ _rwice_ Di
# ACKNOWLEDGMENTS

_The project otn which a previous version of this paper was based was conducted in China during 1989-1990. The National Natural Science Foundation of China provided financial support for the project. Ren Ruoen (the first author), invited by Professor Stanley Fischer, refined this work in the Department of Economics at MIT, supporledfinandially by the Edhcation Committee of China and the World Economy Laboratory at MIT Finally, ken Ruoen finalized this paper in the SocroEconomic Data Division of the WorldBank as a resident consultant_ _In this research Ren Ruoen benefited considerablyfrom the advice of a number of eminent schoklrs, but the most profound influence has been that of Professor Stanley Fischer. He was most generous with his time so that Ren Ruoen had opportunities to discuss this topic with him extensively and received many valuable suggestions Ren Ruoen also would like to thank him for assistance in obtainingfundig through MIT._ _Professor Dwight Perldns of Harvard University made penetrating observations on a previous &raft and took keen interest in the results of this work_ _Ren Ruoen would like to tha Professor A. Bergson of Harvard University for suggestons and Professor J Poterba and W Wheaton ofMITfor discussions andforproviding datix_ _The colleagues in the World Bark Mr. John O'Connor, Mr. Sultan Ahmad, Mr. Jong-goo Parkread aprelimminy drf of the paper and gave many valuable comments and suggestions. Ren Ruoen also would like to thank his colleapes Mr. Bons Bimic-Metzner, Mr. Jitendra Borpujari and Mr. Yonas Biru for discusson and help. Furthermore, Ren Ruoen wishes to ackiowledge comments from Professors AlanI Heston of the Umversily of Pensylwmk4 Professor Angus Madisan Bart van Ark Adam Szirmai and Dirk Pilat of the University of Groningen, Professor Clopper Almon of the University ofMa,yland4 andMr. Peter Hanrold andMr. Zafer Ecevit of the World Bank_ _The paper was edited by William Prnce of the WorldBank and Cheng Guangkm of MIT_ _Professor Han Yue e of the Beiying University of Aeronautics and Astroniauics made her conribuions to this project when it was conducted in China The authors are gratefid to Professor Cui Shuwaang of the Central Institute of Economics and Finance in Beijing acnd Professor Mao Yusiu of the Social Science Academy of China for heoful comments and to Jiang Wei, Zhang Xiaobin, Zeng Zhohui, Liang Mingjie and Cheng Jun for research assistance._ iv
# 1. INTRODUCllON

1. It has been more than ten years since China embarked on a program of econonic refonm aimed at rapid economic development through greatly enlarged participation in world trade. As a result, China's economy has been one of the fastest growing economies in the world with an associated improvement in the standard of living. However, according to the estimate based on the World Bank Atlas approach in _World Development Report,_ the dollar Gross Domestic Product (GDP) per capita of China has remained in the range of $300-$370 during 1980-91 (World Bank, 1992).

2 The question ofthe true standard of living and productive potential of China is very important, not only for providing a measure of China's potential but also for assessing Chinese growth perfonmance. As China becomes a significant force in the world, economists have become increasingly interested in estimating the size of its economy. The purpose of this paper is to present a detailed bilateral companison of GDP between China and the United States wnth 1986 as a reference date, usig the purchasing power parity (PPP)' approach formulated by the United Nations Internaonal Comparison Program (ICP). The findings in the study include the following: a) Chia's per capita GDP in 1986 international dollars<sup>2</sup> (1$) is between I$770 and I$S1,044 depending on the different assumptions made in the comparison of the compansonThe term PPP refers here to the purchasing power of currency, and not to the purchasing power parity theory (see, Kravis, 1984, pp. 2).

2 The term "International Dolls" (I), which has by definition the same purchasing power over total GDP as the U.S. dolar in a given year (see World Bank (1992), pp. 299-300), is used here to signiif that all estimates of GDP in this study are based on the ICP-type approach. These figures, therefore, can be compared with ICPbased GDP estimates, but not with GDPs converted at exchange rates. It should of course be noted that the term "1$" has been used in ICP's Geary-Khamis multilateral comparisons rather in bilatral comparisons, as here.

1
resistant service sectors and the quality adjustments made in the calculation of PPPs in a number of selected areas.

b) Based on the impact of inflation in the United States on the purchasing power parity and the growth rates computed from national currency GDP data in constant price for China, China's per capita GDP in 1991 turns out to be between 1S1227 and IS1,663.

3. These estimates are compared with the figures of the U.S., Germany, India and Japan, as shown in Table 1. These figures are comparable since all figures are estimated in the same framework (ICP). But there are two points which should be considered when one wants to use these figures to discuss the difbrent issues. One is that this study is a bilateral comparison, and all other figures are from the ICP bench k studies which are multlateral comparisons, The other is that some adjustments (oth quality adjusmnt and institutional adjustment) have been made in this study which are not the nonnal procedure in ICP comparison.

Table 1: PER CAPITA AND AGGREGATE GDP OF CHINA, U.S., GERMANY, INDIA AND JAPAN IN 1991

||Per Capit|a GDP|Aggrege|GDP|Average Growth Rate of<br>AggMgae GDP in|
|---|---|---|---|---|---|
||L___|SUS=100|BillionS|US=100|1980-1991 (%/0)|
|U.S.|22,130|100.00|5,592.0|100.00|2.5|
|Jaan|19,390|87.62|2,402.8|42.97|4.3|
|(Germany|19,770|89.34|1,584.2|28.33|2.4|
|China (ih)|1,663|7.51|1,909.1|34.14|9.4|
|(low)|1,227|5.54|1,408.6|25.19||
|India|1,150|5.20|996.5|17.82|5.4|

Note: The growth rate figures which use 1987 as base year are taken firm the World Bank data bae. China's figures are firm this study. Other counties' figures are ICP esumates which are m intenational dollars. Except Iniabs figures, which are extrapolated from 1985 bencbiark estimates, all figures are extrapolated from 1990 benchmark estimates. Germany's figures refer to the Federal Republic of Germany before unification.

2
# IL A RETROSPECTIVE OF ESTIMATING CHINESE REAL INCOME

4. Because national income figures published by China since the 1950's were computed by the Material Product System, many economists have been interested in estimating China's real income by Western statistical definitions and pracdces (Liu, 1968; Swamy, 1973; Liu and Yeh, 1965, 1973; Eckstein, 1973; Perkins, 1975, 1980, 1988). The emphasis of these efforts was on developing esfimates of Clina's real income in Chinese currency (uan), rather than in U.S. dollars.

5. Since the early 1980's, China's statistical authorities have begun to calculate gross national product (GNP) accordng to standard inteational methodology. In 1992, a new national income account **s** ytem conformed with the basic definition and methodology of the _UnitedNaivon System of National Accounts_ (SNA) (United Nations, 1968) was implemented to estimate the size of Chinas economy in Chinese anency.

6. Though more accuate and detaled data for China have been issued, the debate over U.S. dollar esfimates of China's GDP has confinued. The range of e)dsting dollar measures of GDP by different methds reflects the difficulty of esfimating the size of a trnitional economy. The most oftenred methods include the World Bank Atlas approach (World Bank, 1991c), the reduced information method (Ahmad, 1980), ICP technique (Kravis,et al., 1975, 1978, 1982) and productionbased PPP approach (Taylor, 1991). Efforts to calculate a US. dolar value of China's GDP by different methods have produced estimates that vary by a factor of '0, as shown in Table 2: 3
# Tablc 2: THE COMPARISON OF CIL'NA AND THE UNITED STATES BY VARIOUS ESTIMATES

|Country|<br>Source|Agggate G|DP|Pcr Capita G|DP|
|---|---|---|---|---|---|
|||(MillionS)|US = 100|-US$)|US=100|
|U.S.|World Bank|4.223,168 (1986)|100.00|17,480|100.00|
|China|Pcnn (Mark 4)|3.409,700 (1985)|80.70|3,248|18.57|
||Penn (Mark 5)|2.614,200 (1988)|61.90|2,368|13.55|
||Kravis|2.056,000 (1986)|48.68|1,930|11.04|
||Gordon|1,582,000 (1986|37.46|1,485|8.50|
||Ahmoad|1,064,200 (1986)|25.20|999|5.70|
||Ccnsus|836,253 (1986)|19.80|_785_|4.50|
||ACDA|416,528 (1986)|9.86|391|2.30|
||World Bank (Atlas)|330,239 (1986)|7.81|310|1.80|
||WEFA|324,913 (1986)|7.69|505|1.70|

Source: U.S. dat fiom _World Development Report, 1989,_ and other numbers fxon the cited studies.

7. World Bank Atlas approach is an exchange-rate-based conversion method. The conversion factor for any year is the average of the exchange rate for that year and the exchange rates for the two preceding years, after adjusting them for differences in relative inflation between the country and the United States (World Bank, 1991c). Usually, this approach gives lower estimates of real income for the developing countries which can be explained with the findings in ICP and other theoretical studies on the relationship between PPP and exchange rate in low-income countries based on the productivity diferential or factor proportion differential model (Kravis, Heston and Summers 1982; Kravis and Lipsey 1983; Bhagwati 1984).

8. Gordon,et al. (1990) constructed PPPs in each sector of the economy based on some strong assuptions and estimated the size of China's economy in dollar temrs. Ahmad (1983) compared the stnucture of China's prices with those of other countries in a standardized format to construct retail PPPs and to estinate real income for 1981. An overall PPP (2.23 vuan/dollar) reported in Taylor's paper (1986) is used in the Arms Control and Disamament Agency (ACDA) estimates (1988). This 4
PPP is from Han's study (1982) where Han calculated the ratio of the sum of China's imports and exports at domestic prices in yuan to the sum of the same at world prices in dollars. This parity seems to only reflec **t** he relative price level differentials intradables between China and world market, which should be smaller than that in non-tradables as many studies in this field have demonstrted. Wharton Econometric Forecasting Associates (WEFA) constructed retail price PPPs to estimate the dollar net material product of China for 1981 (WEFA, 1984), which is below the exchange rate estimate. 9. The ICP has been under way for over two decades. Benchmark surveys have been made in 90 countries at one time or another (Kravis, et al., 1975, 1978, 1982). The benchmark estimates were extrapolated to other countfies and years in five versions of Penn World Tables (Summers and Heston, 1984, 1988, 1991).

10. Kravis (1981) used the ICP approach to approximate China's real income for 1975. His estimate was a "reduced information" exercise and involved the highest levels of expertise available in the international comparison research.

11. The Penn World Table (Mark 3) published in 1984 includes China's per capita GDP in U.S. dollars from 1950 to 1980, which are extapolations of Kravis' esimate (Summers and Heston, 1984). The 1988 Penn World Table (Maik 4) provides a revision of the previous estimate (Summers and Heston, 1988). The latest Penn World Table (Mark 5) gives an estimate of China's per capita GDP of $2308 for 1988, which was also extrapolated fiom Kravis' estimate (Appendix B of Summers and Heston, 1991).

5
12. The Penn World tables estimates, when appliod to the published growth rates, imply income levels for China that are too high 3. Kravis initially published an estimate of China's real GDP per capita in 1975 as 12.3% that of the U.S. (lndia was 6.6%/o). However, that figure, '-upled vith China's growth rate during the last decade, would have put China at well over 20% of the U.S. per capita GDP in 1988, which most experts on Chin's economic development believe is too high.

13. The Cenos study, which is a production-based PPP comparison, was completed by Jeffrey Taylor in 1991. Taylor used producer price information from a variety of sources to estimate the average sectoral dolar/yuan price ratios for 1981. The price information for calculation of secoral PPP in the service sectors are iWrred by introducing input-output relationships between the services sectors and non-service sectors. His approach differs accordingly from the ICP approach (Taylor, 1991).

14. In an annex to the World Bank report entitled _China: Long-Term DeveIpment Issues and Oplions_ (World Bank, 1985), an input-output table for 1981 was compiled on the basis of a vaiety of published data. To identify "real" stnctural dfferences and sinilaiities between China and other counties, menmbers ofthe mission attempted to correct for these price differences between China and other cuntries on the very limited information. They estimated price adjustment coefficients in each sector and used them to modify the input-output table. In principle, each price adjustment coefficient should be the ratio of the average price of gross output in the sector in question in a typica **l** ow-income counfy to its average price in China, suitably cored for differences in commodity composition 3 The World Bank (1989b) reports a per capita growth rate figure of 5.5% from 1965 to 1988, implying adoubling every 13 years.

6
within the sector. During the process of collecting price data, various sources, including _Statistical Yearbook of China,_ Annex A of _China: Socialist Economic Development_ (World Bank, 1983), Anexes B and C of the present report, and World Bank project appraisal reports, were used. For other countries, retail, wholesale and ex-fictory prices were used, though in many cases, Chinese puices had to be compared with world market prices, either by calculating dollar urit values for China's exports and inports, or by direct reference to sources such as _Commod&y Trade and Price Trends_ (World Bankl annual). These world pnces were adjusted for transport costs and other fictors such as taris and subsidies PPPs used here were deived by dividing the official 1981 exchange rate of 1.7050 yuan/doDar by the aveage sectoral price adjustment coefficients in Tayloes study (Taylor, 1986), 15. The confusion should be avoided that is to compare the esfimate for China based on PPP approach with the estimates for other developing economies based on the Atlas approach. The diffirent esfimates of GDP per capita by different methods imply a very different relative standing of China to other counties, as demonstrated in Table 3.

7
TABLE 3: CHINA IN DIFFERENT RANKINGS

|Ranking|World Bank (Aias)<br>(1988)|Pen<br>(1980)|Penn<br>(1985)|Penn<br>(1988)|
|---|---|---|---|---|
|16|Nigr<br>(260$)||||
|17|Uganda<br>(260S)||||
|18|China<br>(290$)||||
|19|Somaia<br>(290$)||||
|20|ToM<br>(290$)||||
|52||Bolivia (1,529Y|)||
|53<br>||Philppines (1,551$)|||
|54||China<br>(1,619$)|||
|_55_||Guyana (1,623$)|||
|56||Thaaind(1,694$)||<br>|
|62||||Botwana<br>(2,282)<br>|
|63|||_|SomonIs.<br>(2,282)<br>|
|64<br>|1|1||China<br>2,308|
|65||_|Algeria(2,142)|Jordan<br>(2,356)|
|66|||<br>Ecuador (2,387|Jamaica<br>(2,362)|
|67<br>||_hina|(2_444)||
|6S<br>|r|_|Turkey<br>(2,533)<br> <br>||
|69h|||Colomnbia<br>(2599|)|
|g||_<br>_<br>_<br>_|<br>||
|Soe:<br>lhe|World Bank ring<br>i take<br>ddkint years ver made b<br>Heston, 1988, 1991).|n from_Workd Deweop_<br>y the autho based on d|_ment_<br>_Repot 1989._The<br>ata mn The Penn Worl|Penn rnidngs in the<br>d Table (Sunmmrs and|

16. Changes in exchange rates either as a resul of a countrys devauation or as a consequence of its decision to allow its rate to float fieely, may lead to comparisons which are not related to relative real growth rates in the counties under compaison For example, per capita GDP of India in 1970 was $1 10 and that of China was $130 in the same year. During the next 20 years, per capita GDP in local currency grew at an arual rate of 5.5 percent in China and of 2.0 percent in India, raising the level of per capita GDP in China rlative to that of India by about 3.5 percent per year (World Bank, 1989b). However, if official exchange rates are used, the real per capita GDP in Clina relative to India did not increase at all ($360 for China and $350 for India in 1990, (World Bank, 1991c)).

8
# IIL OUTLINE OF **THE** PPP **BILATEIAL** COMPARISON METHODS

17. The actual work of bilateral comparisons from the expenditure side includes two main stages. The first is to choose a sample of items and to match their qualities for the two countries being compared. This sampling of items and matching of quality should be undertaken in the Classification System of the ICP (Krvis et al, 1982). The second stage is to aggregate the quantities being compared.

18. The GDP of each country represents a population of final purchases of commodities and services. Between the two populations of transactions, there are some commodities and services th are common to both countries, and others that are only included in either Clina's set or the United States'. In priniple, an interaional pnce comparison woud be based on a re sample of the price ratios from the commodities and services found in the overiapping set. The foilowing two iunds of data were used in the binaty comparisons: a) Expenditures in domestic currencies for al detailed categories of comnodities and services defined by the ICP approach. These expenditures add up to GDP. A sample of price ratios that in most cases provides at least one price ratio for each category.

- b) A sample of price ratios that in most cases provides at least one price ratio of each category.

19. The ICP approach carries out the intemational comparison of income through price comparisons for about _150_ detailed categories. The methods chosen for the binary comparisons should satisfS the follovwring three requirements: a) Charactenisicity: the comparison between the two counties should be based on the best samle of representative items that can be obtained for the two countries. Prices wil be

**9**
most comparable and the expenditues used as weights in the compazisons will be based on spending patterns ofthe countries being compared.

The countr-reversal test: In a given bilateral comparison, it should not matter which county is used as the base country. Ths means that if Ij represents the price index for curies j and k with the base county in the denominator, then the following identty should hold:

**_Ijlk X IkIj_** _= 1 (I)_

# c) Factor-reversal test: The product of the price and quatity ratios should equal the expenditure ratio. For the test to be met, both the price and quantit ixes must be computed independently.

20. The fist calculation is carried out within each detailed category. Becase the expenditure data used as weights are not available at the detailed category leve, an unweighted geometric mean of those mean ofthose price rtios is used for that category. For example, fbr category I: where (PPP)S is the purchasing power parity (PPP) of the i-th detailed category; P., is the price of a-th item in China; P. is the pnice of a-th item in the United States (the prices are expressed in the local cunencies); and A is the number of items wiithin the category. The geometric mean is preferable to the arithmetic mean because the former satisfies the county-reversal test. For discussion on this topic, see Kravis et al. (1975).

10
21. Averaging within each detailed category gives us the PPP for each of about 150 detailed categories. Laspeyres, Paasche, and Fisher index number formulas were used to estimate the PPP for GNP and other aggregates. Thus, the PPPs for the detailed categories were aggregated first usmig U.S. expenditure weights and then the China expenditure weights. The formulas for the U.S. and China the U.S. and China weighted indexes are: <!-- Start of picture text --> =u x w, (3)<br>= 1 (4)<br>,-) X wic<br><!-- End of picture text --> where the indexi mrns over the categories, **_Li_** is the subscript for the United States and c for China The weights are: <!-- Start of picture text --> W. fU (5)<br>'lei,<br>e.c<br>wie (6)<br>leke<br>i-,<br><!-- End of picture text --> where e is per capita expenditue in local curncy. The Fisher index, which is the geometric mean of the China-weighted and U.S.-weighted index munbers was calculated for each sector. The aggregation methods suggested by ICP has a very intuitive interpetation, especially because the intnational coDmpasons can be regarded as the counterpat to the single county intertemporal comisons in a II
certain sense. The reader is refrred to Hill (1982) and Diewert (1986) for excelent discussions of this issue.

22. After selecting the sample of prices and specifing each item in the sample, the quality of goods selected from both sides are compared carefidly to ensure that qualities are equivalent between China and the United States. For some goods, such as foods, quality can be assumed to be the same; while for others, no brief specification can define the product with sufficient precision to ensure the matching of qualities. Each specification still covers a variety of difrent goods.

23. A usefil way of coping with ftis problem is to consult engineering perts m this field. Sometimes, they can give the price rdatives for products whose qualities are matched, or they can tell the specification for products that are matched. By these chdes, more pnce ratios could be found for the sample. Tlhs approach was used in aicmft (14.400), ships and boats (14.500), and metalwng mhineuy (I15.400).

24. The criteia used in the matching process are:

- a) Phvsical idenity: The preferred method is to find goods that are physically identical in both countries. Ths is possible where the same goods of a given brand or btademark are sold. Many durable conamer goods and other goods can be included in this group, beause imported goods were selected for these specfications

- b) Equivalene in qualiit: In some cases, eactly identical conmodiies cannot be found. However, there are products in both countries that confom with the same genral specifications, but have slight dfferenc i deign or composition that seem to be relativy unmportan For these goods, it is sail to ignore the dfifeces and include the items in the comparison

12
- c) Replication of produts: In principle, the end product is regarded as the standard in assessing equivalence in quality, and diffeent pices are compared fbr equivalent goods even though different means of pmduction are used in the two countries.

- d) Equivalence in use: Some cases were encountered in which products are not physically identical but clealiy sewved the same need or use. The most obvious eaample is the lih bulb. 120-volt light bulbs are used in the United States, whereas the 220-volt light bulbs are used in China. They are treated as eqivalent products because it appears that there is no difference in the cost of production were the two types of bubs produced under simlar conditions in the same country, and that no differnc edsts in thir utility.

- e) Taste eqlence: In a few cases, one vaiant of a product is cheaper tan another in one coury, but thei price relationship is reversed in the other country. These instances were regarded as attnbutable to taste differnces, and a direct price compaison between the m

- cheaper vaiants each country was made.

- IV. BILATERAL COMPARISON **BETWEEN CHINA** AND **THE UNITD** STATES

1. Colecting and Processing of Data

25. The basic da=a for binaty compaison indes prices of goods and services and relevant expenditue. In ICP pracice, the quantity compariso was to be derived by divdg the price ratio into the expenditure ratio, so it was necessary to ensure that the pnce used for each specification corresponds to the price embedded in the expendte figure (Krvis, 1981). The classification of expenditre and the sample of itwms priced are showm in Armex, Table 5.

13
26. Sources of the price data for goods and services in China include _Price Statistical Yearbook of China_ (State Statistical Bureau, 1987), local _Price Inforimation_ in some provinces, _The Price Handbook in Heavy, Machinery and Transportation Industies_ (Processed), newspapers, magzines, and other sources. Where national average prices are not available, this project's research team conducted a market survey through field observation and correspondence inquiry in ten Chinese cities: Beijing Shangbhai, Shenyang, Taiyuan, Xan, Chengdu, Nanjing, Wuhan, Kunming, and Guangzhou. The average of prices in these cities was taken as the national average pice. Some price data that are not for 1986 were converted to 1986 pIices by relevant price index nunibers. If prices for some goods were obtained in only one city, they were converted to national averages using the regional diffbrences issed by the State Price Management Authorities.

27. Since there are multiple prices existed for many items in China, thus it was very difficult to adjudge whether the prices used in this study are matched to the prices used by the compiler of GDP except m some cases, for exmle, the mixed average prices provided in the _Prices Sistical Yearbook of China_ and the prices in the _Prices Handbook in Heavy, Machinery and Trarportton Industries._ This will lead to errors in the PPP for fte basic headings and the final results.

28. Sources of price data on the U.S. side include _Stoaistcal Abtact of the United States_ (U.S. Bureau of the Census, 1987, 1988,1989), _CPI Detailed Report_ (J.S. Bureau of Labor Statistics, 1986), _Producer Prices and Price Indexes Data_ (U.S. Bwueau of Labor Statistics, 1984), _Producr Price Indexes Data_ (U.S. Bureau of Labor Statistics, 1985, 1986), adverements in such newspapers as _7he New York Times_ etc., the price lis of several supeimarkets, the Chinese version of the market survey report by consulting firms in the United States, and interviews with ten Cminese scholars who lived in diffrent cities in the United States in 1986 and had more than one year of stay in the U.S.

14
Some pnce data were estimated from quantity and expenditure data. Table I in Annex shows the distribution of the sample and size of sub-sanples.

# 2. Matching of Quality

29. As mentioned above, for some goods such as foods, quality can be assumed to be the same, at least in terms of equivalence in use.

30. In tobacco (01.400), the three American brand cigarettes that are mnost popular in China were selected. In clothing and footwear (02.000), we consulted with experts in these industies and then decided on the selection of goods. After the first author arrived in the United States, he re-amined the issue of quality matching in these categories and found the matching of quality was reasonably satisfactory.

31. In furiure, furnishing, household equipment and operations (04.000), different approaches dalng with quality matching were employed in various detailed categories. In fnitur, fixtures, carpets and other floor covering (04.100), for example, the principle of equivalence in use was followed, so those goods which are very often imported from abroad or those goods considered as luxury goods by Chinese standard were selected. In heating and cooking appliances, and major household appliances (04.300), the criterion of equivalence in quaLly was used.

32. The situation in transport and communication (06.000), was similar to that in furnitur etc. Those goods wlich are either imported or produced on an imported assembly line were selected. The exprts in tansport and communication were consulted to make sure that the quality was matched.

3. Some **Topics in the Biltral Comparison** 3.1 Gross Rent Comparson 15
33. According to the specication in ICP approach, market prices for housing services are available only for rented dwelings. Price conipaiisons for housing services in this study are based on the comparison of rents. This is far more difficult than comnparions for oter consumer commodies and services because there is a Uiinited possi'blity for substitution among houses in different locales, and there is a large variety of dwegings with respec **t** o stnctre, condition, size, facilities and location. A much greater dispersion of rents around the national average e,dsts for each given type of dwelling ta is the case for most other commodities and servces. Perhaps housing is one of the categories in which the difference between high and low-income countries is quite subsil. As a resul, the degree of overap in the types of housing between China ad the U.S. is apt to be much smaller than the _other_ commodities and sevioes. The compariso in this category is also more complicated because houing is heavily subsidized in China. If the very low house rents actualw churged in China were compared with those in the United States, the real housing aqexediture and PPP in this categofy in China would be und ated In Kravis' study (Kravis, 1981), he raised this issue and atmpted to esgime 'the fij social cost of housing." 34. So, in this comparison, a "shadow rent" approach based on oveil costs of housing construction was exemised. When the fsadow rets were esimated, the cost of land, insrance and pmfits were not inchluded inthe calculation becaise data on these items are not available, alhugh these items are icorporated in the rent in the U.S. Therefore, the inclusion of the cost of land in the estimation of shadow rents in China wuld raise the parity. The procedure for the esimnation is demonstrated in Table 2 in Annex 35. Shadow rent represents the "space" rent required by the ICP. It can be treated as the national average rent because the constuction cost of buildig being the base of the estimate is an avge 16
fige. Since the constructon cost of buDding in 1986 was used in estimEang the shadow rent, the esmaed rent can be assumed as what the rent for the dwelings constructed in the recent year would be if the housing market eists at that fime in China 36. In the United States, rent is largely determined by the mariet mechanism. However, there are some forms of rent control exdsting in 200 communifies in New York, New Jersey, Massachuetts, Conmecticut, and Califoria as of 1986. Also, housin voucher provide cash assistance to low-income households to help pay rent for mmmum-sandar **d** weling uimts otherise unaffole. In 1974, an existing housing program was created in the Section 8 Program of the Housing and Community Development Act When other frms of Section 8 assisance were added to the Existing Housig Progra, an estmated total of 2,139,000 lower-income households received payments in 1985. In this study, these two ret subsides have not been taken into accowt, because detailed data on rent control and vouchers were not available for the purposes of the estmation 37. Rents in the U.S. were calculated with a regression equation estimated by a sample contiy about 10,000 dwellings selected in 1975 in the U.S. (Kavis, et al, 1982). In the equation, the dependent variable is the natura **l** ogaithm of rent of a dwling in national currency. The characteridss of dwdings are the eplantory variales that are included in the equatfon as a set of dummy variables The idea ofthe procedue is rooted in the hedonic indexes approach (GTiliches, 1971). As showninTable 3 inArx, theaveragerntintheU.S. esmd by the regssion equation was adjusted to the benchmark year.

17
# 38. Rent Comparison:

Table 4: BILATERAL COMPARISON OF GROSS RENT

|Category|<br>Price|Price|Parity|Weigh|Weight|
|---|---|---|---|---|---|
||(ChinaYuan)|(U.S. $)||(China, /)|(U.S. /0)|
|Rent|459|431.62|1.063|19.81|62.15|

39. The parity of rent between the two countries is based on the above estimation. Rent in China is calculated by assuming 60 square meters per dweUing and then multiplying by the per-square-meter rent shown in Table 2 in Anmex. Rent in the United States is for 60-square-meter dweDings built in 1986 with electricity, water, flush, bath and central heating. The U.S. rent obtained from the equation is an estimate of the median rather dtan the mean rent. The shadow rent in China is mean, so the median needs to be converted to the mean by an adjustment fictor of 1.04 (Kravis, et al, 1975). The mean standard rent thus becomes $431.62 (=$ 415.02 x 1.04). The weights in both countries refer to the weights for category 03.000: gross rents, fuel and power.

# 3.2. Medical Service Comparison

40. In ICP, direct price comparisons of service outputs are not made for three sectors: health care, education, and govement sewrices. This is due to the great difficulty in defining satisfactory measures of outputs in these sectors, and in colecting the data on those measures if they could be defined.

41. For medical care service comparisons, two approaches can be applied. One is the specific service comparison and the other is the compaison of annual average earnings of medical professionals. Although the second approach cannot avoid the problem of quality matching, it does have two advantages. One is that it can result in more compreheasive price comparisons than the 18
comparisons of a limnited number of specific services; the other is that it does not involve the problem that differences in services and security regulations between the two countries cause a difference in the costs of the services. Thus the second approach was employed in the comparison.

42. The use of inputs as output indicators in intemational companisons for the comparison-resistant service sectors involves an underlying assumption about the productivity differential between professional personnel worling in these sectors of the two countries. Kravis, et al. discussed this issue in general in their report on Phases **m** of the ICP (Cravis, et al. 1982) and Gordon, et al. discussed medical care service comparison between China and the United States in particular in their study (Gordon, et al. 1990). Gordon, et al. also suggested that the staiscs in the UNDP's _Human Develpment Report 1990_ (UNDP, 1990) on ifi **e** xpectancy, mortality rates in child birth, inoculation aganst isease and other indicators of health could be taken as evidence of the high quantity and quality of care provided by China's 4.97 million health care workers to its populaton of over 1 bilion people.

43. The diference between the two countries in the length of training peiod and in the quality of medical education leads us to believe that the average quality of service could be quite different between the two countries. At this stage, an assumpfion has to be nude that there are no differences in quality and productivity between the medical professionals of the two countries. This underlying assumption and the sensitivity of the final companson reslts to altemative assumptions will be analyzed in section VI. ANALYSIS OF ERRORS.

44. The items of comparison include eamings of physicians, eamings of dentists, and earnings of nurses, physiotherapists, technicians, midwives, and pharmacists, etc. AU esfimated earings are disposable incomes because they are below the minimum income level to pay tax according to the 19
income tax law implemented in China in 1986. So conceptually, these eamings are equal to the aftertax income in the United States.

45. The earnings of medical professionals in China were estimated by including the base and duty salaries of doctors and other allowance **s** uch as bonuses, benefits and labor insurance (including medical care insurance, and fiinge benefits for birth control, death, care for dependents, poverty, entertainment, bathing, and haircuts) and housing allowances. The base and duty salaries are diferent for various levels of medical professionals, but the allowances are the same. The estimated earnings for medical professionals inChina are presented in Table 5.

# Table 5: EARNINGS OF PHYSICIANS, DENTISTS AND NURSES, ETC. (YUANIYEAR)

|Category|Base and<br>duty<br>salary|B<br>Bonuses|onuses, bene<br>Benefits<br>and labor<br>insurance|fits and allowan<br>Housing<br>allowances|ces<br> <br>Total|Total<br>earnings|
|---|---|---|---|---|---|---|
|Physicians|1,616|432|236|_1,051_|1,720|3,335|
|Dentists|1,616|432|236|1,051|1,720|3,335|
|Nurses, etc.|788|432|236|1,051|1.720|2,507|

Notes: 1. In China dentists are not distinguished from physicians as a different profiession. 2. Earnings of physicians and dentists are geometric means of eamings of the various levels of physicians and densts.

3. Earnings of nurses etc. are a geometric mean of eanings of various types of non-doctor medical professionals.

4. Benefits and labor insurance are computed by dividing tot expenditures on benefits and labor insurance by the number of employees.

5. Housing allowances are computed by the shadow rent estimated in this paper. The formula is: Housing Allowance = 7.65 yuan/sq.m.mon x 6.36 sq.m. (average housing floor per person in urban region) x 1.8 (1 dependency ratio) x 12 mon.

46. To calculate the eamungs of physicians, denfists, and medical professionals, the data on fte number of doctors and national health expenditu in the _StuiticalAbslract of he United States_ **_were_** 20
used (U.S.Dept. of Commerce). After deducting personal income taxes from the U.S. figures, medical services were compared, as shown in Table 6:

# Table 6: BILATERAL COMPARISON OF MEDICAL SERVICES

|Category|Price<br>(China's Yuan)|Price<br>_(U.S. $)_|Parity|<br>China<br>Weight (%)|U.S.<br>Weight(%)|
|---|---|---|---|---|---|
|Service of Physician|<br>3,335.19|103,771.84|0.0321|<br>70.41|23.39|
|Service of Dentists|3,335.19|125,518.99|0.0265|||
|Service of Nurses|<br>2,507.31|23,593.22|0.1062|||

Note: The weights in both countries refer to the weights for service of physicians, dentists, and nurses and related professional and semi-professional personnel (05.300) in medical care and health expenses (05.000).

# 3.3. Education and Government Comarison

47. Since an "output" of qualified students is very difficult to quantify, the approach in 'bis sector was similar to that in medical services. Following UNESCO's defintions, teachers can be classified in three levels: prmary school teachers, secondary school teachers, and college and universr.y professors. Because primary and secondary school teachers educated at the same level receive similar salaries, the education comparisons of ICP are divided into two categories: earnings of teachers in prnmazy and secondary school, and eanings of college and university professors. The bilateral comparison is shown in Table 7: Table 7: BILATERAL COMPARISON OF EDUCATION

|Category|Price<br>(China sYuan)|Price<br>(U.S.S)|Parity|<br>Chna<br>Weight (%/6|U.S.<br>)Weight_1%)_|
|---|---|---|---|---|---|
|.Earnings of Primary and||||||
|Secondary<br>School Techers|2,654.83|18,169.18|0.1461|<br>30.08|34.7|
|Earnings of College and<br> <br>||||||
|University<br>Professors|3.129.96|21.080.77|0.1485||.|
|Source:<br>from the_Sta_|_tistical Abstract o_|_f the United St_|_ates, 1988._|||

Note: The weights in both counries refer to the weight for education (07.400) in the category of recreation, enetainments educaton, and cultaral services (07.000).

21
48. The comparison of govemment services in ICP is made by input, rather than output, of government activities. In the comparison for this category, as in other service sectors, govenument employees educated at the same level are assumed to have the same productivity in the two countries. A comparison of annual average income of government employees in China and U.S. is shown in Table 8.

Table 8: BILATERAL COMPARISON IN THE PUBLIC FINAL CONSUMPTION

|Category|Price<br>(China's Yuan)|Price<br>U.S. $)|Parity|<br>China<br>Weight (%)|U.S.<br>Wei<br>(/)|
|---|---|---|---|---|---|
|Salary of Government<br>||||||
|Employees|2,554.04|21,018.96|0.1215|<br>4.61|11.41|

# 3.4. Gross Capital Formation Comason

49. The difficulty with the matching of quality and identification of sizes, plus the fact that price data on producer durables are generally not published in the U.S., makes the gross capital formation comparison the most intractable among all compansons. Due to the absence of relevant data, the subaggregates for land improvement and plantation and orchard development (13.000); increase in stocks (18.000); and net export of goods and services (19.000) were deleted from the study.

50. In the comparison, a disfinction should be made between the matching of quaity in an economic sense emphasizing the equivalence in some key properties between two goods, and the matching of quality **in** a technical sense requiring the fiul coincidence in specfication. The principle of the matching of quality in an economic sense has to be followed in this study for practical pipose.

51. In some categories, goods with the same specifications are used in both China and the United States, because the imported goods are dominant in China's market. For example, in office macines 22
(15.300), imported computers, printers, duplicator and facsimile macines were selected as items for comparison. In these cases, the matching of quality is good.

52. For other goods, because the specification for one good in one country matched the specifications for two or more goods in another country, the average price of the goods in the latter country was used for comparison. An example of such an approach using electric motors is demonstrated in Table 9.

Table 9: CHARACTERISTICS OFELECTRIC MOTORS BETWEEN CHNA AND THE U.S.

|Parmeta|China|U.S. ()|U.S. (2)|U.S. (3)|
|---|---|---|---|---|
|Horsepower<br>Rotational|25|25|26|24|
|Speed (rpm)|1,800|1,750|1,800|1,850|
|Weight (g)|50|48|52|50|
|Price|**PC**|Pd|P,|P.3|

In this case, the parity should be: _R (pa i ty) PI_ 7 53. When the price relatives in a category are available for some products but not fbr others, the ICP approach allows the other price relatnies to be esfimated using the available ones. For exaunple, if the price relative for locomotives (14.110) (RI), passenger cars (14.200) (R2), and Tnwls, buses, and trailers (14.300) (R3) are known, but the price relatives for aircaft (14.400) (R4) and ships and boats (14.500) (R5) are unknown, R4 and R5 can be estimated using the following formulas: 23
_R. = {R, X R 2 X RJ_ _(8)_ _R._ = _VRSR XR2 xR3 (9)_ 54. This approach was used for railway vehicles (14.100); engines and turbines (15.100); construction, ning and oil-field machinery (15.500); and electical transission, distrbution, and industrial apparatus (16.100).

55. For some goods, equivalence in specification, type or fimction could not be fiund. Therefre, the paameter having the strongest influence on the price of the goods was selected as the bais for quality matching If this paaneter was matched, the goods were conidered as satisfig the requement of quality matching.

56. Only in recent years could dweDings be sold in China, therefore basic price infonnation on residendal buildings covers the period from 1988 to 1990, which have to be extrapolated backward to 1986. Prices of non-residential buildings were estimated based on the costs of those buildings. Prices in the U.S. can be estinatedby selling prices and floor space (from the _Stat&i Absact of the United States, 1988)._ Bilateral compaisons for constuction are shown in Table 10: 24
# Table 10: BILATERAL COMPARISONS FOR CONSTRUCTION

|Types of Construction|China Price<br>(Yuanlsq.m)<br>_______|US Price<br>(S/sq.m)|Parity<br>_____~|China<br>Weight<br>~~~ ~~<br>(%/)|US<br>Weight<br> <br>(00|
|---|---|---|---|---|---|
|Residntial Houses|773.27|621.35|1.244|4.29|22.04|
|IndustnalBuidcg|442.03|493.90|0.895|||
|Conumn-ial Building|452.76|354.65|1.277|||
|OfficeBuilding|639.19|1,153.29|0.554|||
|EducationalBuilding|784.89|1,150.59|0.682|||
|Hospial andInsiutional Buldi|743.56|1,094.09|0.680|||
|Odtr Buildin|760.69|881.34|<br>0.862|||
|Total Nonresidential||||68.22|12.18|

- Note: 1. The selling pnce of resikential buildings in China is the gcometri mean of the selling prices ranging from 426 to 1,800 yuantsqm. in eight districts in China.

2. The sellig pnce of re-ndntial building in th U.S. was calcultd based on the data in Section 26: Constraction and Housing of the **_Satistical_** _Abstract of the United States, 1988._ 3. The price of non-resikdetial buidgs in Chna is the cos of buidig accrding to dt construction sumdard of China.

4. The prices of non-rsidntial buldig m the Uited States was computed based on the data on the value of construction and floor space of builings in Section 26: of _Statistical Abstract of the United States._

# **V. RESULTS** OF **THE BILATERAL COMPARLSON**

57. The purasing power parity for GNP and its components, as the resuk of the bfaitra comparisons, are presnated in Table 4 in Aimex. The per capita GDP of China is 909 yuan in 1986 (World Tables 1993). The estimated dollar per capita GDP of China in 1986 is 1$1,044, by using the converter of 0.8709.

_58._ If the estimate (IS 1,044) developed in this stdy is taken to be compared with other esimates cited in Table 2, one can see that oiher estimates differ substaialy fiom this estimate except Ahmad's estimate ($999). It is worthwhie to diss the reasons for the discpancies.

25
59. The estimate in this study should exceed the World Bark's Atlas estimate ($310) because it is derived by an exchange-rate-based conversion. WEFA's estimate ($305) seems unacceptable because it provides an esfimate lower than the exchange rate conversion, although it claims to follow the PPP methodology (Taylor, 1986). Gordon study ($1,485) applied the PPP concept in general but has weak statistical support and strong assumptions. So it is hard to compare his estimate with the results deuived in this study.

60. Taylor' **s** tudy presents an altemativ **e** stimate ($785) from the production-side. This estimate was used by IMF to give a revised weight for China in its _World Economic Oulook AF, 1993)._ Taylor's procedure is much different from the standard "industry of origin" approach. "Industry of **orgin",** which originated fiom Rostas (1948) and Paige and Bombach (1959), has been systematically used by the Internional Comparisons of Output and Productivity Project (ICOP) at Grongn University since 1983 (Maddison and van Ark, 1988). An obvious difference in Tayloe **s** tudy is that only China's gross values of output were used as weights to denve sectoral PPPs rather than the quantities of both the counties being compared as the "industry of origin" approach suggested. Considering the nature of PPPs over sectors or over the entire economy as an aggregated ratio of prices, one-way-weiting approach applied in the ag on seems inapproprate. Another possible source of eror is to geneate PPPs for missing sectors consing of a lot of non-tradables (e.g., services) by PPPs for maaring sectors which obviously inclde mostly trdables based on an input-output relationship (Taylor, 1992 pp.27).

61. Penn World Table's results ($3,248 in Mark 4 and $2,368 in Mark 5) were extrapolated firm Kravis' estfimate ($1,930) which followed the ICP methodology. So only Krais' study and the present 26
study are based on the same approach. The possible reasons for Kravis estimates to be higher than the esimates developed here are: a) Kravis study calculated the PPPs by a sample of prices with limited coverage.

b) In the present study, the several adjustments in housing and service sectors have been made which lead to PPPs for these categories which are nuch higher than those shown by the acta prices.

62. To calcuate the dollar per capita GDP of China n 1991 in curmen pnces, the growth rates computed from national curncy GDP data in constant prices were used and then the estimates were adjusted by the U.S. iation rate. First, China's per capita GDP for 1991 in 1986 constant pnces was calculed by the following equation: _percapita GDP',"'_ = _percapita GDPmxgrnwthratebya*ionaIcurrency (O0)_ So China's 1991 per capita GDP in 1986 intemational doDlars is: I$1,044 x 132.07/o = I$1,379, where 132.07% is the growth factor for GDP for China from 1986 to 1991, calclated from GDP in 1987 piices (see the World Tables 1994). Second, the 1991 China's per capita GDP in current prices was calculated by the folowing equation: M _~~~~USGDPDe&ltOr,.9, percacpita GDP'I9V =percpilta GDP, "x USGDPDeflator, (1)_ = Thus the 1991 China's per capita GDP in 1991 international dollars is: I$1,379 x 116.9% / 96.92% I$1,663 and C:hinas aggrgte GDP in 1991 is I$1,909.1 bilion.

27
# VL ANALYSIS OF ERRORS

63. It should be stressed that the estimation of GDP for any country in an intemational comparative framework involves two distinct stages. In the first stage, GDP data in national acurencies are compiled in an intemationaily standardied framework (SNA). In counties where the compilers of national accounts have adopted the SNA framework, GDP data are comparable in terms of the economic activities covered by the data, but not conparable in terms of the unit (national aurencies) in which these data are epressed. In counties where the compilers of national accounts have been followmg other frameworks (MPS), GDP data are incomparable both in terms of the coverage of econonic activities and in terms of the unts in which these data are valued. In the second stage, GDP data **in** national crency are converted into a common curency, e.g. US dolars or intenmational dollars, depended on the converter used. Thus in order to obtain meamnil inteational comparison of real GDP, both stages are necessary for counties which do not work witin the SNA framework. For counties which have adopted the SNA fimework, studies belongmg to the second stage are stil necessary. Obviously, the long-term efforts in ICP frmework have been focused on the second stage rather than the first stage of makng GDP data intemationally comparable.

64. The history of itrnational compazisons sows th the early compeison were mnade between the industial countries (Gilbert and Kravis, 1954; Gibrt and Assodates, 1958). When the int onal comparisons were made under ICP, which inchlded developing economies, mny issues were raised with regad to concepts, methodology and econonuc justifications involved in these comparisons. These were discussed densvely in the magnum opus of Krais et aL (1982, see also Kravis et al., 1975, 1978). It is easy to see that cross-system comparisons between different ldnds of economies are more difficul **t** han compaisons betw mar economies (Maer, 1985). For this 28
reason, a bilateral comparison between China and the United States is subjected to a lot of unusual methodological problems, as China has a nmuch lower income level and very different in3titutions. This study should therefo be consdered a very prdimiay comparison. It does not attempt to give a point esimate with certainty, but only possible orders of magnitude vithin which China's dollar per capita GDP night be. So it is vety important to analyze the sources of erors and figure out a possible margin for the esimates.

65. ICP study shows that deleting Come sub-aggrgates will afect the final results. To analyze the effects of errors in the comparisons of gross capital fmation, the results of the comparisos after deleting one to five sub-aggregates from the original sen sub-aggregates were calculated and compared It wuas fund that eors ie as the zmer of the deleted increases 66. Because the national aveae prices were not aviable in some categozies for China, an average of prices coilected in ten cities was regarded as the national aveage prce, It was not possible to mcorpomte pnce infation from mral areas in the calculation of the national avge pnce, due to the lmitations oftime and resources. This should lead to distortion into the final results.

67. In tis study, an effort has been made to estimate some prices where markets still do not dear or even do not exist in the benchmark year in China, as in the cases of ret, health services, education and govenent. On the one hand it seems that the adjustments made in this study are not enough and an upwards bias may stfl exist in esmating real income. On the other hand these 'shadow prices" were not matched by an increase in the estimate of reevant penditnu, and this might mean a downwards bias in estimating real income. 68. Another source of errors is the use of prices of some imported or wjuy goods in the survey. For some categories, there are no comparable domestic goods, so imported goods wer taken as 29
representative. For some other categories, there are domestic substitutions for imports, Hee, there are two kinds of enors involved in the companison in question. First the selection of imported and luxury goods does not meet the requirement of charcteisticity, because it is sure that these goods account for a small share of the goods actually consumed in these categories in China Second, the price differentials between imported and domestic goods only partially reflec **t** he quality differentials. In other words, the imported goods are more expensive not just because their quality is higher than that of similar domestic products, but also because they are ovepriced just because they are imported goods. Generally spealdng the inclusion of the prices of imported and luxury goods in the sample of prices would lead to an upwards bias in estimating real income in the first case and an downwards bias in the second ca. The former soue of errors should be considered seriously because the quality matching is always the key issue in the ICP-type comparison between a developing and a developed country. In order to explore how the quality diffeential afts the esimate of PPPs in these categories, an adjustnent of 50%/O has been made in Clothing (02.100) and Furniture (04.100). 69. An assumption of no intemational productivity diffential between professional personnel was nade for the comparison hi those comparison-resistanca egories. Many sudies under ICOP project **t** have demonstrated that the productivity gaps between the countries can be very differen among the industries (van Ark, 1993, van _;._ rk and Pilat, 1993), and the other studies have shown that the service sectors in the low-income countnes could have relative hier productivty h the ma g sectors (Bhagwati 1984). There are a lot of unsolved questions involved in the measu t of service sectors in the national accounts and in the intnational compaisons (see Kravis et al. 1982, pp.129-162).

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70. In the Phase III of ICP, the number of pupils were introduced to be a furth_r dimension of output in the education sector, the result **s** howed that the low-income countries have higher quantity indexes because they have larger class sizes than the higher-income countries. Altemative approach is to take educational achievement as the indicator of output. The results of intemational test for several subjects across countries were used in some international comparisons (Kravis, et al, 1982, Pilat, 1993). It uill be worthwhile to use this approach to make an altenative assumpton on the productivity differential when the data for Chinese studente achievement are available in the future. 71. In order to test the sensitivity of the final resuts to the diiftf assumption on the international productivity differentiaL itwas assumed that the productivity of a Chinese doctor is equal to one half of that of an American doctor because American doctors have better facilities and asssnce, and longer training time, as well as other possible fictors influencing their efficiency (Kravis, et aL 1982). By this assumption coupled with the adjustmnent made in the two categories, the purchasing power parity for GDP changes from 0.8709 to 1.1805 and dollar GDP per capita of China in 1986 decreases from 1$1,044 to I$770. Using this new estimate for 1986, the 1991 China's per capita GDP in 1991 dolgars changes from I$1,663 to I$1 ,227. It is easy to see that if the same productivity adjustments were made for the education and the government sectors, the PPP over GDP woudd be much higher and real income level would be much lower. The results of applying alteatively the esimates of PPP before adjustment and after adjustment to China's per capita GDP in local currency (World Tables, 1993) for 1986 and 1991 are sununaized below in Table 1 1: Table I 1: DOLLAR PER CAP1TA GDP ESTIMATES FOR CHINA (IS)

||After ad=ustme|Before adjustment|
|---|---|---|
|1986 _|770|1.044|
|1991|1,227|1,663|

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72. It may be noted that the World Bank has been working with the Chinese authorities to improve China's national accounts. It is believed that China's estimates of GDP in national cuTrency terns would be significantly increased if, following the SNA recommendations, adjustments were made _for_ under reporting and improper valuation. The Bank has made an interim adjustment and raised the yuan estimates of GNP (World Bank, 1994), but this paper has not taken account of these adjustments.

# VIL CONCLUDING REMARKS

73. The purpose of this paper is to estimate a conversion factor which can be used to convert macroeconomic indicators from local currency to US dollars for China based on ICP-type methodology. Since this is a cross-system comparison, many adjustments have been made in order to take the institutional differences between the two countries into account, especially, in service sectors.

74. Some areas can be identified where fiuther research would almost certainly improve this esimate. First of all a new survey of prices supported by the official statistical authorities will provide more information on the yuan/dollar price ratios for all sectors. This may correct some biases in this study due to lack of information, for example, the price differential between urban and rural areas, and the allocation of imported and domestic goods in some categories. It should be stressed that the estimates of PPPs and real income depend on information used in the study. Moreover, the final results are more sensitive to the changes in prices than to the changes in expenditure.

_75._ Additionally, a bilateral comparison between China and the U.S. by the "industry of origin" approach should strengthen the basis for future assessments considerably. This is an ongoing project which could not onlv provide a cross-check with this study but also provide additional information on 32
productivity differentials. Since data from census of industies can penmit a detailed and rdiable estimate of PPP for each industry in manufactring and other industries by the "industry of origin" approach, it might be more usefull for economic analysis and for formulation of economic policy.

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