The biggest world economies by purchasing power

This story first appeared in the March 6, 2003 issue of WWD. Subscribe Today.

The fashion industry seems to be obsessed with China. Miuccia Prada has mined the country and culture for creative inspiration, while Versace has opened stores in Shanghai, Beijing and Hong Kong and now wants to expand into secondary cities. Meanwhile, companies such as L’Oréal view Russia as a growth opportunity. Based on purchasing power parity (PPP), Russia and China look like good bets. But underneath the strong PPPs are two economies with fundamental problems that must be addressed for sustained economic growth. Note: PPPs are theoretical exchange rates that take into account the cost of living differences between countries. For example, most goods and services are cheaper in China than they are in the U.S. As a result, $1,000 will be “worth” more to the Chinese consumer than one in the U.S. To reflect this difference, the OECD* calculates PPPs on the basis of periodic price comparisons and national inflation figures around the world. PPP estimates are usually shown on a scale of 1 to 100, where the U.S. is 100. They are multiplied by a country’s gross domestic product per head.



PPP $9.6 trillion

Like a morning-after hangover, the U.S. economy is paying the price for high times. By now it’s a well-known fact that the economy in recent years grew at a faster pace than the rest of the developed world by indulging in a consumer boom that had to be paid for with borrowed money. It was an unsustainable path that is now in the painful adjustment period. Experts are divided over whether the dollar will head higher or lower as worries about the possibility of a U.S. strike against Iraq continue to weigh on the currency.



PPP $4.9 trillion

Measured by purchasing power parity, China is the world’s second-largest economy after the U.S. China has experienced one of the fastest industrializations in history, growing like Japan did three decades ago: quickly and from a low base. Yet China’s policies inspire caution, which could make it vulnerable to any serious economic slowdown. In a country that’s obsessed with state power and control, the political pressures of restructuring state enterprises may be difficult to carry out.



PPP $3.4 trillion

China’s strength as a trading nation worries others in the region, especially Japan. The country’s minister of finance and other government officials have accused China of unfairly maintaining an undervalued currency to make exports more attractive. They’ve tried repeatedly to drum up international support by casting the value of the yuan as an issue at G-7 meetings. The yuan is too cheap, says Japan’s ruling elite, claiming that China is exporting deflation.



PPP $2.4 trillion

The PPP effect sharply shifts global economic rankings as evidenced by India and China overtaking the European countries and Russia and Brazil entering the top 10 economies. India’s gross domestic product for the year ending March 31, 2001 was $457 billion and its per capita GDP a paltry $450. But India is trying to make economic headway; it joined the OECD’s Development Centre and has been trying to improve structural deficiencies in its economy and revamp outdated competition laws.



PPP $2.04 trillion

The euro’s climb against the dollar has risen to such heights that its strength is starting to undermine exports, the one segment of the German economy that’s providing growth. The euro was artificially depressed after its debut, in part due to problems of the German economy — Germany accounts for more than 30 percent of the eurozone. While Germany has been leeching investment, particularly to the accession countries to the east, the rest of the zone has been holding its own.



PPP $1.43 trillion

The U.S. has been the world’s economic leader for more than a century and economic theory suggests that western Europe should be catching up. But average GDP per head in the EU, measured at purchasing-power parity, is only three-quarters of that in the United States. According to the Conference Board, Belgium, France, Germany, Ireland and The Netherlands now boast higher productivity output per hour than the U.S., but average productivity in the EU is dragged down by Britain, Spain, Greece and Portugal.



PPP $1.4 trillion

When it comes to the economy, the rivalry between France and the U.K. is even more bitter than the Franco-Italian battle over which country has supremacy in the areas of food and fashion. The French were practically dancing in the streets at the news that their country pulled ahead of Britain in the PPP stakes. Yet, while France’s purchasing power parity may be slightly higher than the U.K.’s, Britain has the faster-growing economy.



PPP $1.35 trillion

According to the OECD economic outlook, the Italian economy is expected to gather strength in 2003 and 2004, when a pickup in world trade will likely boost exports. In addition, inflation is expected to drop below 2 percent by 2004. “At the same time, there is a need to strengthen the underpinnings of growth through a more decisive action to liberalize product markets and to improve the functioning of the labor market,” the OECD wrote in a preliminary report.



PPP $1.2 trillion

Chile, Brazil and Venezuela are examples of liberalizing markets in Latin America that are relatively fragile. The countries are heavily dependent on undiversified export sectors, making them highly sensitive to fluctuations in commodity prices. Brazil, which has Latin America’s largest population and one of the world’s worst income inequalities, is less poor than its $3,000 annual income implies. Incomes there are equivalent to $ 7,500 a year in PPP terms.



PPP $1.16 trillion

The Russian government has used economic growth to eliminate budget deficits, increase financial discipline in the economy and make progress on structural reforms. While Russia’s economic revival has been aided by strong oil and gas prices and a weak ruble, the OECD reports that further reform is crucial for establishing conditions that would make the growth sustainable. The OECD’s Economic Survey of the Russian Federation warns of a possible future energy crisis in the absence of regulatory reform in the oil and natural gas industries.

SOURCE: THE ECONOMIST POCKET WORLD IN FIGURES 2003 EDITION; *Organization for Economic Cooperation and Development (OECD)

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