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.These new price data imply that the real exchange rate with China has fallen (the dollar has depreciated relative to the yuan) and that the Chinese economy is 40% smaller than we thought it was. Can anyone think of an incentive for the Chinese government to under-report inflation?
From the Financial Times via marginalrevolution.com and kids prefer cheese.