Why is it that people in China save/invest an average of 44.3% of their GDP while most Americans don’t even have enough savings to cover an unexpected $1,000 expense, even though the per capita nominal GDP of China is not only lower than the USA, but the total nominal GDP is still lower, despite more people living in China than in the US?
You might already know that that’s because nominal GDP isn’t a very good measurement of the standard of living, so most economists use GDP (PPP) instead, but why?
Nominal GDP per capita is a very objective measure, meaning that it is not based on any opinions. But it has some obvious problems:
- if you go to a dentist in the USA, and he tells you that you have 9 cavities, and spend $1,500 to “fix” them, the GDP of the USA just went up by $1500. But if you go to a more ethical dentist that sells you $54 worth of prescription high-fluoride toothpaste that can fix your cavities without needing fillings or drilling into your teeth, then the GDP of the USA only goes up by $54 (which is mostly a real story of me in Texas!)
- if you buy a new $70,000 Mercedes GLC 300, the GDP of Germany just went up by $70,000. If you hire a butler for $150,000/year to drive you around, now the GDP just went up by another $150,000/year. But if you live in China and you take the subway for $1 per day, then the GDP of China only goes up by $1 per day (even though the subway is a self-driving electric car that is far safer than being on the road)
- If you go to Italy and buy a $2,000 leather belt (even if it would cost only $20 to make in China), well, the GDP of Italy just went up by $2,000 even though all they did was put a fancy logo on it (and possibly pay some high school dropouts or whoever lives in Italy to sew the belt)
But another problem exists whenever different currencies are used
- If you are in a hypothetical scenario where all trade in every country in the world completely stopped, then calculating the nominal GDP of China in US Dollars would be impossible. It works the other way around too; in this scenario, the nominal GDP of the USA in Chinese RMB would also be impossible to calculate.
- In the above scenario, trade between these two countries gradually restarts by someone in the USA buys $100 worth of Chinese dumplings, then
- the nominal GDP of China measured in Chinese RMB would be normal at 131.9 trillion RMB
- the nominal GDP of the USA measured in US dollars would be normal at $29 trillion
- the nominal GDP of the USA measured in Chinese RMB would be zero
- the nominal GDP of China measured in US Dollars would be infinity (division by zero)
GDP per capita PPP is much harder to calculate (as it can be very subjective), but it is far more accurate. However, the fact that it is so subjective means different entities might disagree on the exact numbers
