Noriki Hirose

(Economic and Social Research Institute, Cabinet Office)

    When measured in the purchasing power parity (PPP), China and India are largest economies in the world. They also registered high growth rates these years, combination of the two facts creates significant implications for the future economic relations: The Chinese economy will surpass the U.S. in around ten years from now; The Indian will overtake the Japanese in about five years time, and etc.

    A simple theoretical reflection on the combinational deduction negates such casual observations. The PPP disproportionately expands the non-trading sector whose growth rates are much slower than those of the trading sector. Therefore, one can compute exact growth rates reflecting new relative proportion of the trading and non-trading sector, and reaches significantly slower overall growth rates than the headline rates.

    The above conclusion implies two things: first, there need due reservations with respect to the analyses that use the data measured in the PPP against the headline growth rates such as ones in the tests of economic "conversion"; second, it is a faulted exercise if one estimates the future economy size by extrapolating at a headline growth rate the benchmark GDP that is adjusted by the PPP.