What the Gross Domestic Product Does and Doesn’t Tell Us About China

China’s GDP, with its projected value for 2019 at around $14.2 trillion according to the International Monetary Fund’s World Economic Outlook, makes it clear we’re dealing with an economic superpower. According to the same source, China’s GDP is expected to grow by over $1 trillion each year until 2023 and most likely beyond.

While it will most likely not surpass the United States GDP anytime soon, projected at roughly $21.5 trillion for 2019 and which is also expected to grow, even if at a pace slower than that of China but still noteworthy (in the $800 billion per year region), pretty much all analysts agree that over a longer timeframe (a let’s say multi-decade one) it is quite unlikely that China won’t eventually make it all the way to position #1. Still, it’s current #2 position in terms of nominal GDP and #1 position in terms of PPP GDP tell us a lot.

A lot… but not everything.

Unfortunately, as far as the average consumer is concerned, the GDP is just as misunderstood as it is widely used. Whenever a TV report or an article refers to the economic performance of a nation, it’s extremely likely that the analyst in question will start by mentioning the Gross Domestic Product of the country in question, which is not a bad thing in and of itself. What’s troublesome is that most analysts stop there. They limit themselves to analyzing a country’s GDP, as if this figure encompasses absolutely everything there is to know about the nature of its economic growth.

Huge, huge mistake.

The GDP gives us an interesting grand total by telling us how much money everyone generated COMBINED within the borders of a certain country. What it fails to do, however, is provide more granular context-related information and as such, it’s worth mentioning some of the limitations this metric has:

1. While it tells us how much an economy is grown, it doesn’t let us know how sustainable the growth in question has been. In light of the fact that the Gross Domestic Product measures ALL economic activities that take place within a country’s border, it makes no distinction between let’s say sustainable growth and unsustainable growth. For example, it’s obviously not a good idea to set your house on fire and build a new one instead. But for the GDP of your country, this is great news because absolutely everything you do is included in the GDP equation: the money you spend on gasoline and the box of matches required to start the fire, the economic activity generated by the crew that cleans up after your mess, the economic activity generated by the construction workers who build your new home and so on. A rational observer differentiates between logical economic activity (building a house because you have land and need one) and irrational economic activity (setting your house on fire so as to build a new one)… the GDP doesn’t “care”
2. Contrary to what many mistakenly believe, the GDP does not tell you how much money a country “makes” or in other words, how much money the government of the country in question has at its disposal. As such, you also need to analyze the GOVERNMENT REVENUE metric to get a clear picture of how GDP growth translates into things the government can actually do. If let’s say taxes go down dramatically, the GDP increases a lot but the collection of taxes doesn’t improve due to things like economic operators willingly moving from black and grey markets to legitimacy, then the coffers of that nation’s government may very well end up being emptier than the year before despite massive the GDP growth which just took place
3. The numbers can indeed be “fudged” or to put it differently, if those running a country desperately want to report a GDP growth rate higher than the real one, they can find “creative” methods to do just that. As such, again, context is the operative word and you need to add other metrics to the mix to get a more believable picture. Is the GDP growth of a certain country matched by symmetric growth when it comes to let’s say energy consumption and similar metrics? That would be one example of a question a responsible analyst needs to ask himself
4. The GDP itself does not offer enough information for you to determine how much growth potential there still is on the table. Other metrics are once again necessary, such as adding the population dimension to the mix and calculating the GDP Per Capita. For example, the GDP of the US is a little over 1.5 times higher than that of China, whereas its GDP Per Capita is roughly 6.5 times higher than the Chinese one, which tends to indicate there is still quite a bit of growth potential on the table for China

… the list could go on and on.

At the end of the day, many of the GDP-related limitations are just as valid when it comes to China as when analyzing other nations, some even more so. From positive ones such as there being ample room to grow due to China’s low GDP Per Capita to negative ones such as GDP growth not always being sustainable. Context, context, context!