Assume That China's Entire Tertiary Sector (Services) Is Non-Traded

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The Answer is a. China's service sector is relatively unskilled, abundant, and underemployed. Wages in this sector are relatively low compared to the more dynamic tradeable sector vis à vis the United States. Prices in this sector also are relatively low. One should keep in mind that in the United States the minimum allowable wage at the national level is USD 7.25 per hour and higher in many individual states. Prices in turn in the non-tradeable services sector tend to be relatively lower in China.
b. If we assume that PPP holds then the Chinese service sector not only has a relatively low price-it also has an absolutely lower price. Thus, simply applying the PPP exchange rate will preserve the relatively low wage in USD terms and underweight the real value of output in China's services sector. In other words, we will underestimate Chinese GDP if we ignore relatively low service sector prices in China.
c. Ideally, we would want to apply each USD price to every unit of real output (goods and services in China), that is, China USD GDP = P$,T x QChina,T + P$,S x QChina,S where T and S stand for traded goods and S stands for non-traded services. Thus we would be valuing Chinese output at U.S. prices and better be able to compare China's real output with that of the United States.
d. This approach does in effect attempt to assign USD prices to all Chinese goods and services as recommended in (c). In the process, it attempts to identify an exchange rate that gives on average the same market basket of goods (tradeable plus non-tradeable) the same price USD price in each country.
Here we have a PPP exchange rate of RMB 3.37/USD compared to a market rate in 2010 of 6.77. This would imply that Chinese USD GDP would be twice as large using the PPP exchange rate (2.01 times to be precise). In other words, China's 2010 GDP would be in USD: USD 11.9 trillion instead of USD 5.9 trillion. Wow-what a difference.

a. China's service sector is relatively unskilled, abundant, and underemployed. Wages in this sector are relatively low compared to the more dynamic tradeable sector vis à vis the United States. Prices in this sector also are relatively low. One should keep in mind that in the United States the minimum allowable wage at the national level is USD 7.25 per hour and higher in many individual states. Prices in turn in the non-tradeable services sector tend to be relatively lower in China. b. If we assume that PPP holds then the Chinese service sector not only has a relatively low price-it also has an absolutely lower price. Thus, simply applying the PPP exchange rate will preserve the relatively low wage in USD terms and underweight the real value of output in China's services sector. In other words, we will underestimate Chinese GDP if we ignore relatively low service sector prices in China. c. Ideally, we would want to apply each USD price to every unit of real output (goods and services in China), that is, China USD GDP = P$,T x QChina,T + P$,S x QChina,S where T and S stand for traded goods and S stands for non-traded services. Thus we would be valuing Chinese output at U.S. prices and better be able to compare China's real output with that of the United States. d. This approach does in effect attempt to assign USD prices to all Chinese goods and services as recommended in (c). In the process, it attempts to identify an exchange rate that gives on average the same market basket of goods (tradeable plus non-tradeable) the same price USD price in each country. Here we have a PPP exchange rate of RMB 3.37/USD compared to a market rate in 2010 of 6.77. This would imply that Chinese USD GDP would be twice as large using the PPP exchange rate (2.01 times to be precise). In other words, China's 2010 GDP would be in USD: USD 11.9 trillion instead of USD 5.9 trillion. Wow-what a difference. More information on this series can be found at: http://pwt.econ.upenn.edu/Documentation/append61.pdf For proper citation, see http://pwt.econ.upenn.edu/php_site/pwt_index.php

More information on this series can be found at: http://pwt.econ.upenn.edu/Documentation/append61.pdf
For proper citation, see http://pwt.econ.upenn.edu/php_site/pwt_index.php

Assume That China's Entire Tertiary Sector (Services) Is Non-Traded

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Assume That China's Entire Tertiary Sector (Services) Is Non-Traded

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