A reasonable look at China's GDP (I)
- By Xia Changjiang
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E-mail China.org.cn, March 3, 2016
Third, they have simply equated the CPI with the GDP deflator. Unlike the situation in the West, consumption only accounts for a small proportion of China's GDP, so its influence in the final calculation is limited. In China, what really maters are fixed-asset investment and foreign trade. Hence, it's unfair to use CPI to judge the correctness of the GDP deflator.
Fourth, they might be making the calculation the wrong way around. Some people first calculate nominal GDP growth, then adjust the figure for inflation to finally work out the real GDP growth. However, China does it the other way round. It first calculates real GDP growth based on the increase of the real quantity of goods (e.g., in the transportation industry, the real quantity of goods is calculated by the total turnover of all transportation methods). It then adjusts for inflation to work out nominal GDP growth. Actually, following China's calculation method, the lower the GDP deflator is, the lower the actual GDP.
Growth and profit in industrial sector
Statistics show that in the industrial sector in 2015, the revenue of major businesses grew 0.8 percent while profits dropped 2.3 percent. However, added value grew 6.1 percent. Some people have therefore deduced the figures were fiddled, and then began to doubt the GDP growth number.
For starters, we should know that added value is calculated in real term, while the revenue and profits of major businesses are expressed in nominal terms. So, after adjusting the figures for inflation, the revenue of major businesses in the industrial sector in 2015 grew 5.5 percent, slightly lower than the growth of the added value.
The added value includes profits, wages, depreciation charges and net taxes on products (net indirect taxes). Therefore, even when profits drop, if the other factors grow, the total added value may increase.
In the case of China, huge investments have been made in fixed assets since 2008, and these assets began to depreciate recently. Meanwhile, the price index of fixed-asset investment, which measures the scale, speed, structure and effectiveness, has been growing. The two factors combine to produce an increase in fixed-asset depreciation, subsequently leading to an increase in added value in the industrial sector.
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