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Comment by tomp | Hacker News Reader

> These calculations are based on a well-established and widely used economic measure known as purchasing-power parity (or PPP), which measures the actual output as opposed to fluctuations in exchange rates. So a Starbucks venti Frappucino served in Beijing counts the same as a venti Frappucino served in Minneapolis, regardless of what happens to be going on among foreign-exchange traders.

> PPP is the real way of comparing economies.

So, it's not entirely clear if China is really the biggest economy, or just by using an accounting trick called PPP GDP. Sure, maybe a Chinese middle-class person can buy more Beijing Frappucinos than a middle-class person in Minneapolis, but the disparity in foreign exchange rates still means that an American coming to China can buy more Frappucinos than a Chinese person coming to the USA.

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Frappuccinos are more expensive in Beijing than Seattle (I know, I have a habit...). Actually, many things in China are more expensive than in the states: if you want the "lower cost of living", you have to be willing to endure the "lower standard of living" that is possible in China without as much stigma as in the US.

If you want a nice apartment, nice safe food, decent education for your kids, a car, medical care, you've got to pay more dearly for it.

Frappuccinos are sold as a luxury aspirational product though. Thats what the PPP adjustment is supposed to adjust for, although the PPP calculation makes a lot of assumptions, and could well not be that good a measure.

Clean air and safe food are luxury aspirationsl products here and just expected in western countries. What is cheap: maybe prepared food if you don't mind gutter oil, taxis since you can't buy your own car without winning the plate lottery, maids who don't really clean, fake alchohol that might kill you. It seems to me that the assumptions are all bunk; rich people take vacations to the states because things are so cheap there.

What about compared to NY? Also, it might make sense to compare Starbucks in China to a non-us company in the US. Midn you, I understand that PPP does matter (e.g. products imported to both China and USA, such as German cars, will probably be priced lower in China than in USA precisely because of PPP difference), but nonetheless it's just one way of measuring the size of economy, not necessarily the right one.

All other things equal, german cars are going to cost as much in China as they do in the USA because China gets no discount because of it's weak currency, in fact when buying abroad it works against them. They still need to pay the germans just as much hard cash as americans do.

The advantage PPP gives poorer countries is that goods that depend on domestic labour, which is very cheap, get to be equally cheap. Any goods or services that don't depend on that cheap pool of domestic labour don't get that benefit. German labour in Germany isn't cheaper to buy in China than it is to buy in the USA, so PPP is irrelevant.

As an aside, German cars are actualy vastly more expensive (up to 2x or 3x for high end models) to buy in China than in most countries due to severe import taxes, but the base cost of buying the car from Germany to ship to China would be about the same.

[Re. Some BMWs made in China - in which case they're not really German cars]

BMW manufacture some cars in China.

And they are about 2x the cost that they are in the states. Most of these things are more expensive, not cheaper, here.

While that may be true, I still think parents ELI5 explanation of the problem with PPP in this scenario is very good.

When we are looking at the largest economy in the world, we are looking at world wide numbers and as an American or European most of China is going to feel very cheap.

Not if you live here for a few years. There is a lower floor on quality and standards, as well as labor, but don't expect to get more for your money.

Or fresh air.

A decent Swedish Blueair will set you back 6000 kuai, but it's still not that great.

> So, it's not entirely clear if China is really the biggest economy, or just by using an accounting trick called PPP GDP.

There is no objective way of measuring the size of an economy.

Imagine some hyper-simplified economies where the only asset produced is computers.

Economy A sells 1000 Apple IIs* per year at $3k each. That means it has a nominal GDP of $3m.

Economy B sells 1000 Retina Macbook Airs at $1k each, for a nominal GDP of $1m.

Which is a bigger economy? Nominal GDP says Economy A is bigger: more dollars traded hands. PPP GDP says Economy B is bigger, since Retina Macbook Airs are much more than 3x better than Apple IIs, so the value being produced is greater. But of course this also means we have to define PPP, which is extremely challenging in the context of any modern economy.

It gets even crazier:

Economy C, the government pays workers $5m total to dig unwanted ditches. Nobody gets a computer.

In terms of nominal GDP, Economy C is bigger than Economies A and B.

In Economy C, the workers who've been paid by the govt can then purchase 5000 Retina Macbook Airs at $1k each, the govt receives sales tax, apple employees get paid and pay income tax, and apple employees then spend their remaining money buying more Macbook Airs (going by your simpification that the only asset produced is computers) ... net GDP is then some way over $10m and everybody has a computer and is employed either producing computers or digging ditches

I would suggest that hyper-simplified economies are probably not a good model for anything ...

> In Economy C, the workers who've been paid by the govt can then purchase 5000 Retina Macbook Airs at $1k each

You are assuming transaction costs of 0 for international trade. If transaction costs for international trade are zero, then yes, of course the PPP adjustment would be a non-op. In the real world that we live in, equivalent goods often have very different prices in different countries.

Well, in our hyper simplified economy, the macbook airs are produced domestically - it's the only thing produced in fact (apart from ditches I guess)!

They are three separate economies. If they were not, then the GDP examples makes no sense.

Except that apple doesn't want to sell computers for C$, because all it can buy with them is ditches.

Your example is exactly comparing the economies by PPP, without taking into account the exchange rates. The point is that if you establish trade between economies A, B, and C, people in A would figure out they can get a better deal by buying computers from B, hence the exchange rate would rise, and B$ will be worth A$10 or so. And $C will inflate rapidly, with the government eventually going effectively bankrupt.

Point taken, but you could imagine a state of affairs where the costs of trade are so high that the imbalanced prices do actually represent equilibrium, e.g. imagine tariffs are 100,000% and well-enforced. In the real world non-zero exchange costs are the reason why price differences across countries for identical goods aren't just immediately arbitraged away.

Basically, all forms of measuring GDP are 'accounting tricks' to some extent, or to be more charitable they are estimates based on necessarily incomplete data. For example, by its nature the informal sector can't be precisely measured, but its contribution to total economic output can't be ignored.

http://en.wikipedia.org/wiki/Informal_sector

>It gets even crazier: > >Economy C, the government pays workers $5m total to dig unwanted ditches. Nobody gets a computer.

Because GDP is not nor was it ever meant to be a measure of how great your country is. It is simply a measure of the total volume of transactions (which correlates to wealth but is far from being the same thing).

Certainly Nominal GDP is a measure of the volume of transactions.

However, PPP-adjusted GDP is intended to be a measure of national income in real terms, or put another way, the amount of value actually produced. Which is how people often intuitively think of GDP.

Um, $5 million to dig a ditch still means no value produced even if it was PPP adjusted.

Nominal GDP: $5mil

PPP adjusted: $0

PPP simply adjusts for local costs. It does not adjust for the value created during a transaction.

>Sure, maybe a Chinese middle-class person can buy more Beijing Frappucinos than a middle-class person in Minneapolis,

No, this isn't what's being said as the number we're talking about isn't per capita.

I guess you could read it as approx 4.3 (1.3bn / 300m) middle class Chinese people, between them, can buy more Beijing Frappucinos than a single middle-class person in Minneapolis ...

(of course this still isn't true as GDP is still only a crude proxy for individual income, it really measures the total of a particular subset of all _transactions_ in the economy).

Substitute Frappuccino for a burger and it is the Big Mac index.

http://www.economist.com/content/big-mac-index

In my experience this is a terrible metric. The demographics that McDonalds is marketed in different countries varies enormously. I find in Western countries it is seen as unglamorous, cheap and quick food. Whereas when I was in India, for example, it is much more expensive than cheap food you can buy there, and therefore is seen much more as a nice place to go with your family (or girlfriends/boyfriend), and it tends to be middle class people who go there.

I was trying to think of a good alternative product for this index, but I really couldn't think of any single product that is marketed at exactly the same demographic in each country, as well as having comparable market penetration, and being desired by people to the same degree.

Coca cola could fit the bill

Ironically, Big Macs are on sale right now for 10 kuai in Beijing.

Nice. Maybe not in China, but some countries force McDonald's to lower their BigMac price to hack that index.

The Wikipedia page mentions countries doing this, and, seeing the quality and price of Big Macs in some places compared to other Mc burgers, it's not surprising. E.g. the Argentinian one was half price of everything else, it was an awful burger, meat covering half the bun. And it was never advertised, only conspicuously tucked away at the bottom of the menu in a corner of the shop:

http://i.imgur.com/MbCaZnG.jpg

How's it in China, compared to other burgers?

Ah, Argentinian creative economics. I follow their developments from time to time just for the amazement value, this one is new for me, thank you.

For those curious, here is an excellent article about its history, worth the read: (Paywall) http://www.ft.com/cms/s/2/778193e4-44d8-11de-82d6-00144feabd...

(Google cache version) http://webcache.googleusercontent.com/search?q=cache:eFrFcG7...

And another one with some of the juicy parts: http://www.businessinsider.com/a-timeline-of-argentinas-sord...

The bigmac in China is about the same in quantity to the states, it's normal price is just slightly cheaper than the USA version. Now if they would just give me a second packet of ketchup for the fries and ice in the drink, I might not feel like I'm in a third world country.

Try going into a Greek owned restaurant in the US. They give you the greasiest food possible and don't want you to have any napkins.

This a good explanation, but I have to point out that for this particular example (being able to buy Frappucinos in China because they're cheaper), the opposite is true.

Fun fact: Starbucks is significantly more expensive in China than in America, even if you use the currencies at their current exchange rates.

Not fun fact: I live in China, and I like Starbucks.

Are there any local coffee shops that sever 'western' style coffee? And if so are they also more expensive than Starbucks in the US. Also what is the local equivalent of a cappuccino and what does that cost. PPP generally deals with equivalent goods and not identical goods, especially when the goods have to imported at great expense to one country.

I mean even here in Sweden Starbucks is a good 50% more expensive than your random local coffee shop, so Starbucks probably isn't the best comparison to make.

Yes, and they are, also, ridiculously expensive. A (awful) capuccino can easily cost 30 kuai, where a very nice plate of rice with bacon and garnish from a low-end shop will cost you 10.

The entire drinking coffee outside game is just shockingly expensive in China. At least I haven't found the cheap ones.

1 us ~= 6.15 kuai

Beijing?

I actually haven't been to a Beijing Starbucks, but in Shanghai, Hangzhou and Ningbo, Starbucks products are markedly more expensive. I imagine that for Beijing the same would be true. I suppose I shouldn't speak for China as a whole, as I haven't been to Starbucks all over the country.

They are probably the same price. I was just wondering if you were in Beijing. They have Starbucks almost everywhere now, even my wife's hometown in southern hunan.

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