Chinese Economic Development

6 Chinese Economic Developmentin any given year multiplied by the area sown). The main problem from a nationalaccounting point of view is how to deal with the value of housework, leisure andurban disamenities. As all three are large, the results are very sensitive to the methodof valuation. 5 Third, many would disagree with the notion that certain types ofgoods and services (such as crime, drugs, telephone marketing and advertising)are as valuable to society as education or health care products. For this reason,the Soviet Union used a much narrower measure of opulence (material product)which excluded a range of ‘social bads’ to assess its developmental progress. Chinaadopted the same approach after the Revolution, and this continued until the early1990s, when it reverted to using the GDP approach. 6 The difference between thetwo measures is quite considerable. In 1978, for example, Chinese GDP (calculatedretrospectively) was 359 billion yuan whereas its net material product or nationalincome (guomin shouru) was only 301 billion yuan (SSB 1990a: 4–5). 7At least as problematic is the question of which set of relative prices to use tovalue output. In practice GDP is measured using a fixed set of market prices, orconstant prices. For example, we might value Chinese GDP in 1952 by using dataon the volume of goods produced in 1952 multiplied by the prices of 2007, andcompare it with the value of GDP in 2007 (calculated again using 2007 pricesbut this time applied to the volume of goods produced in 2007). This approachthus factors out the impact of inflation, because the same prices are used to valueoutput in both 1952 and 2007. Although this approach is elegant and makes sense,it does presuppose that the relative prices which existed in 2007 provide a truemeasure of the value of goods. This is by no means obviously correct. Even wheremarkets do exist, they invariably function badly because of a range of imperfections(such as monopoly power and imperfect information); only in economicstextbooks are markets in equilibrium. Furthermore, relative prices can fluctuatedramatically from year to year. For example, the price of oil was quite low in thelate 1980s compared with other goods; by contrast, it was much higher in 2006.Should we therefore use the relative prices of 2006 or those of the late 1980s tovalue output? Unfortunately there is no easy answer to this question, and the set ofprices used can make a considerable difference to estimates of GDP growth.Comparisons of GDP across countries are also difficult. Aside from a lackof consistency in the way production is measured, the main problem is that theexchange rates used to convert GDP from national currencies into dollars areheavily distorted by capital movements, speculation and by barriers to trade ingoods and services. As a result, actual exchange rates are not equilibrium rates.But the problem is not merely one of market imperfections. Rather, price distortionsarise primarily because of the existence of non-tradable goods. The prices oflabour-intensive non-tradables in poor countries are typically much lower than inrich countries; labour productivity differences between countries in these sectorsare relatively small (because little capital is employed), yet wage differentialsare very large because national wages are driven by trends in the high wage –high productivity sector. In principle, the exchange rate should adjust to reflectthese price differences, but the exchange rate cannot adjust to reflect the implicitcompetitive advantage of poor countries if the goods are not traded. 8