Thursday, 18 November 2010

How Rich Are The Poor?

My son is currently living in Taiwan, so stories about Taiwan naturally catch my attention at the moment. There was a story in The Economist about how Taiwan is on the verge of becoming richer than Japan. The counter-intuitive nature of that comment really did catch my attention.

The Economist is quoting IMF figures when it states that the GDP per head of Taiwan is set to be $34.7K this year, against $33.8K for Japan. However, once we start to drill into the figures a different picture emerges. The Dollars used are not real Dollars but ‘PPP Dollars’ (Purchasing Power Parity Dollars). PPP Dollars are an artificial construct that attempts to weight income in terms of the cost of living across countries. The Japanese figure is discounted more heavily than the Taiwanese figure because Japan has a much higher cost of living. However, the adjusted figures do suggest that Taiwan has a better standard of living than Japan, which fits in with the impression that my son creates.

Does this matter? In a sense it doesn’t. These figures a a bit arbitrary and the PPP weightings are something of a guesstimate rather than an accurate measurement. However, there are times when it is important. According to some measures, China will move from the third largest economy in the world to overtake Japan as the second largest economy in the world this year. What we lose in this statistic is exactly how poor China is. The ranking of number two is a volume effect (well over a billion Chinese citizens) rather than an income effect. According to the IMF again, but for 2009 instead of 2010, China ranks 99th for GDPO per head in PPP Dollars (Taiwan ranks 37th and Japan ranks 17th).

Which is the rich country and which is the poor? China could be seen as a rich nation – the second largest economy in the world – whilst at the same time being one of the poorest - 99th in terms of GDP per capita. We haven’t quite come to grips with this dichotomy as yet, and some would say that this will be one of the future challenges that we face.

© The European Futures Observatory 2010

Taiwan and Japan: X not V | The Economist

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