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Here, of course, is where the PPP calculation can fall apart, and it is why the assumption should be explicitly stated. If you are comparing the US with an economy that construct GDP in a fairly similar way, Canada for example, PPP adjustments can be very illuminating because it allows you to compare like with like. But if GDP is constructed very differently than it is in the US, the second assumption is violated, in which case the PPP adjustment becomes simply another random comparison, which might or might not be better than the non-adjusted GDP numbers.
In China, it turns out, and not surprisingly, the composition of GDP is very different than it is in the US, mainly because the two countries measure debt very differently. It is not because China sets out to record debt differently – on the contrary, most people will tell you China records it in the same way the US and other countries do, and China certainly intends to. The problem is that in China bad debt is rarely recognized, repayment isn’t enforced, and default is almost non-existent. Banks simply roll bad debt over indefinitely. This makes comparisons between the two countries pretty hard. Why? It helps us to understand this if we think about the difference in the way we account for expenditures related to consumption and to investment. Normally, when you spend money on consumption, you create an expense. When you spend money on investment, you create an asset.
Let us assume that two identical companies each spend $50 on the same thing (say scientific research), but in one company the expenditure is recorded as an expense and in the other it is recorded as an asset. What would the financial statements for each company look like? The answer is pretty obvious. In the current recording period the first company would show $50 lower net profits than the second and $50 less assets and equity – remember however that there is absolutely no difference between the two companies, only in the way they record expenditures.
We should understand that this difference in accounting isn’t permanent. Over time, the second company will amortize, explicitly or implicitly, the $50 in additional assets, so that in future periods its net income will be a little lower every year, until at some point, when the expenditure (asset) is fully amortized, the two balance sheets will again look identical.
....
The FT article says that the reason Beijing was opposed to the study was fear that “ leaders do not want exposure to the international pressure that comes with being the world’s largest economy, according to people familiar with Chinese official views on the matter.” The article then quotes Vinod Thomas, director-general of independent evaluation at the Asian Development Bank as saying: “They certainly don’t want to overstate the size of their economy. They are sensitive about that.”
I think this is probably correct but I think the FT and others may have missed the point. If GDP is indeed “overstated” by the failure to recognize bad debt, remember that this overstatement is not permanent. The difference will necessarily be amortized over the future, and the result will be that today’s overstatement will be matched by tomorrow’s understatement, and for those who receive my newsletter, I explained in the latest issue that the overstatement is only equal to the understatement if there are no financial distress costs associated with the excessive debt burden. If there are, and there almost certainly will be, tomorrow’s understatement will exceed today’s overstatement.
This means that if you look only at PPP adjustments, China runs the risk of becoming the world’s largest economy earlier than expected, only to slip back to second place over the next few years. This, I suspect, would be a political embarrassment, and it is very understandable why the current administration would not want it to happen.
originally posted by: Iwinder
a reply to: buster2010
The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education
Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.
Regards, Iwinder
originally posted by: rock427
originally posted by: Iwinder
a reply to: buster2010
The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education
Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.
Regards, Iwinder
I can't help but laugh at this argument. Do you have any idea how much the US manufactures every year? Counting mining plus utilities, the US manufactures about $3 trillion every year. To put that number into proper perspective; the US manufacturing output in dollar amount is larger than your countries entire GDP! Manufacturing is a dieing jobs sector due to efficiency gains in things like automation. While manufacturing might be a dieing jobs sector, manufacturing output is the highest its ever been today in the US.
Most of the US GDP is based on internal commerce and in the service sector. Nations that depend on manufacturing for economic growth are typically limited to demand from their customers. Its not a very good economic model for sustainable growth. Growth must come from other avenues. At the most, manufacturing should compliment a countries growth rate (and it does in the US).
I think a lot of you are making too much out of this. I see a lot of blaming Obama (whom I am no fan of). But, in all reality, China has put itself in an economic hole. This will be a lot more obvious once Chinas enormous economic bubble pops.
originally posted by: Iwinder
originally posted by: rock427
originally posted by: Iwinder
a reply to: buster2010
The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education
Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.
Regards, Iwinder
I can't help but laugh at this argument. Do you have any idea how much the US manufactures every year? Counting mining plus utilities, the US manufactures about $3 trillion every year. To put that number into proper perspective; the US manufacturing output in dollar amount is larger than your countries entire GDP! Manufacturing is a dieing jobs sector due to efficiency gains in things like automation. While manufacturing might be a dieing jobs sector, manufacturing output is the highest its ever been today in the US.
Most of the US GDP is based on internal commerce and in the service sector. Nations that depend on manufacturing for economic growth are typically limited to demand from their customers. Its not a very good economic model for sustainable growth. Growth must come from other avenues. At the most, manufacturing should compliment a countries growth rate (and it does in the US).
I think a lot of you are making too much out of this. I see a lot of blaming Obama (whom I am no fan of). But, in all reality, China has put itself in an economic hole. This will be a lot more obvious once Chinas enormous economic bubble pops.
Well slap me silly, good post and I have to offer up this tid bit If I may.
It seems accounting is not a strong point anywhere around the Globe at this time:-)
www.abovetopsecret.com...
What do you make of the data Rock? Don't get me wrong I am not being argumentative I am really asking for your opinion on the link I just put up.
Regards, Iwinder