Today’s post is a crash course in economics (for people who don’t like economics). The truth is that we get a lot of numbers thrown around in the media about China, but I don’t think they are as meaningful as CNN or Fox news want you to think.
Let’s get one thing clear straight out of the gate, China is obsessed with GDP. You can’t go more than a few days without seeing it as some headline on People’s Daily, and I was on the look out for parades or fireworks the day China passed Japan to become the world’s second largest economy.
Virtually any govt. promotion relies on improving GDP and little else.
So what exactly is GDP?
I know it’s a figure we see all the time in the media, but I think GDP might be misunderstood.
First of all, lot’s of stuff goes into GDP figures like: wages, investments, construction, sales, government spending…pretty much any time money changes hands it counts for GDP.
For example if Toyota built a car in China, the profits that ultimately head back to Japan, would be counted in China’s GDP, even though those profits don’t improve Chinese people’s standard of living.
Or if landslides and flooding destroy hundreds of homes, rebuilding them every month would still count as GDP.
Even if you just paid people to sit quietly, it could be counted as GDP.
So ultimately GDP isn’t a very useful number if you want to determine the quality of life in a country.
There are actually a lot of things that limit GDP that could be considered good things too, like not working on a weekend, having subsidized health care, taking long vacations, or not cutting down a forest. (If you are really committed to reading economics stuff, Mismeasuring Our Lives: Why GDP Doesn’t Add Up (Kindle) has some really interesting points, but is not an exciting read)
Does China’s GDP mean that it’s now a developed country?
Like I said earlier, GDP even counts money that is leaving the country, GNI (Gross National income) however does not. When we look at China’s GNI spread out over it’s 1.3 billion people, China ranks 109th (just behind Tunisia).
A better measure of development, that looks at more than just money, is the HDI (Human Development Index). This measure balances life expectancy, years of education, and average income. According to the United Nations, China ranks 89th by HDI, again just behind Tunisia.
China is improving at an impressive rate on this scale, but by this measure is a full 30 years behind the US.
I hope this makes it clear as to why China still claims to be a developing country, because by most measures, it is.
Tomorrow I’ll be trying to answer the big question – Does China’s GDP mean that Communism works?
Tom, Thanks for explaining something I knew intuitively but could not put into words. I use my eyes when in BJ and I have made friends with more than just the emerging middle classes. I value such friendships greatly. Thank you also for mentioning the book about Anhui country life – I’ve bought it!
I’m really glad you are enjoying my blog so much.
Feel free to email me about “Will the boat sink the water” I found it pretty shocking myself.
Good post, Tom. I personally don’t enjoy economics but this is a pretty good way of explaining (in real terms) China’s position in the world. Everytime I hear someone talk about how it is rising up and is the next challenge to the US, I have to remind myself that they are using only one simple measure that is truly not the best measure of the country as a whole. China is still a country caught between two worlds and it is still a very difficult balance to maintain. Hopefully, people will learn not to see it as a monolith.
And your blog is certainly helping in that regard. Thanks!
Well, you can be glad I didn’t get into all of the other economic measures then. My wife is always very helpful in pointing out when I am boring people.
I think people put way to much emphasis on GDP, but most of us don’t understand it well enough to call BS.
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Chinese GDP measures how wasteful China is, not how productive. All empty apartments, shopping malls, office towers, whole townful of buildings are all part of GDP. The roads with no cars, the trains with no passagers (and the expenses of running these empty trains) are part of GDP. The 10 year old high rise torn down so that another one can be built in the same location, and will remain equally empty, is GDP too, twice, once for tearing down the old one, and another for building the new one. Robbing farmers of their land, and build empty factories on it is another way to create GDP – the supposedly inflated land price and the new empty factory building.
There are so many ways to create this GDP thing. As long as the government don’t mind robbing the people, and waste the proceed , this GDP can grow and grow forever.
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Thanks for making that clear, Tom. I was always wondering how come that the living standard is quite low in general, but China still rates as one of the fastest developing economies in the world. So I am correct if I sum it up by saying that as long as something is happening here, whether productive or not, the GDP grows?
That’s right Jana, any economic activity that happens in China, counts as GDP.
Like I said in the post, it’s not such a useful measurement, especially for a country that is so reliant on foreign companies.
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Great site 🙂 Just a note on the Toyota built in China. Yes Japan makes a profit but by building in China it utilises Chinese wages, rent, utilities… therefore it does reflect a production value in the economy and the multiplier effects are very useful to the greater Chinese economy. GDP does not measure standard of living and that’s where GDP per capita is useful as are the other points you made.
Sorry, just had to point it out from an economist 🙂
Matt (Economics teacher in Shanghai)
Thank you for the note. You are right, it is a very important point that the money China brings in from these projects largely stays in the Chinese economy and changes hands dozens of times as a result (multiplier effect).
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If you have free time, please go visitng China sometime in the future. The cites developing speed are incredible. Don’t imagine China from the data or just recall few years before of China. Let me tell the truth about China. In China, there is a invisible and strict social scale. Some cities and towns are 100 years or more behind some developed cities. Even in the same city, people’s live are totally different. For a example, workers’ salary are less than $250 per month. But the foods in market are little bit less than US, they have to live in the free dorm which have very small room and more than 6 live in. But in the bourgeoisie, their standard of living are similar as Amerasians. Some richers are super tending luxury and luxurious lives. Unfortunately, most Chinese are so poor. Let me explain, 1/4 of the earth are cities and the others are countries in China. But for the population, 1/8 are citizens others are not. Half of the citizens(1/16 of Chinese) could live well. They have good cars, living in big apartments and so on. Less than 1/16 people control more than 80% economy. By the way, citizens usually don’t like too many kids in family, but people who living in country sides are really like many children in the family especial sons. But most of them are live hardly even can’t finish their primary school(no money to buy books, but the true is that the total money of 6 years are less than $500,.$40/semester) Most of these family only got around $5000 one year but more than 6 members.
I think this kind of explanation could explain why China have a high GDP but low GNI.
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