Is China Dominating the Global Economy? Uncover the Truth!

The world of economics is often complex and challenging to navigate. When it comes to measuring the value of a currency, the question of how to accurately assess it can be quite tricky. While the standard measure typically used is the CPI deflated trade weighted exchange rate, it may not always provide a complete picture.

1. Consumer vs. Producer Perspective:
   The CPI deflated rate focuses on prices relevant to consumers, rather than producers. This can skew the perception of a currency’s true value, as it may not accurately reflect the cost of production. In his work, Chinn (2006) suggests that unit labor costs (ULC) could be a more appropriate measure to assess currency value.
2. Lack of ULC Deflated Exchange Rate:
   Unfortunately, organizations like the OECD and IMF do not provide a ULC deflated exchange rate for China. This gap in data availability can make it challenging to determine an accurate assessment of the Chinese yuan’s value.
3. Comparing Estimates:
   In the absence of a ULC deflated exchange rate, CEIC has provided its estimate, which can be compared against the BIS CPI deflated rate. This visual representation in Figure 1 allows for a comparison of both values and highlights any discrepancies between them.

Figure 1: CPI deflated value of Chinese yuan (blue), ULC deflated value of Chinese yuan (red), both 2020=100. Source: BIS via FRED, CEIC.

1. Importance of Tradable Sector:
   It’s essential to note that the ULC deflated series for China considers the entire economy, not just the tradables sector. For a more accurate assessment of competitiveness, focusing on the tradables sector would be more appropriate. For further insight into macro competitiveness, Chinn and Johnston (1996) provide valuable discussions on this topic.

In conclusion, while the standard measure of currency value may provide some insights, it’s crucial to consider alternative measures like unit labor costs to gain a more comprehensive understanding. By exploring different perspectives and data sources, we can better evaluate and analyze the value of currencies in the global economy.