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Barrie McKenna
December 19, 2007

WASHINGTON -- The World Bank has come up with a new way to look at the relative clout of economies, and it turns out most previous estimates have exaggerated the size of China's and India's economies by roughly 40 per cent.

The new, and smaller, China still ranks behind the United States as the second largest economy in the world, according to a report on the comparative size of the economies of 146 countries.

And no one disputes the fact that China and India is still growing faster than any other major economies.

But the new figures put a slightly different spin on how economists look at the relative economic clout of countries.

And as the major economic powers look at reforming the World Bank and its sister lender, the International Monetary Fund, the new figures could shift voting clout from developed to developing countries because they are a new way of looking at global economies.

Developing countries have been fighting for more say at the bank and the IMF.

The conventional way to measure and compare economies is to calculate gross domestic product and then convert that into U.S. dollars.

Instead, the World Bank looked at what money can actually buy - the relative purchasing power parity of a U.S. dollar from country to country, based on purchases of more than 800 goods and services in 2005.

It's the first major global comparison of its sort in nearly 15 years.

"While PPP is not useful for commercial purposes, it is far and away the best measure of a country's standard of living," the Carnegie Endowment for International Peace commented on the report.

Based on the new figures, China is ranked as the world's second-largest economy, with its gross domestic product accounting for 9.7 per cent of the world total, behind the United States, which accounts for 23 per cent, it said. Earlier estimates based on older data said China's GDP accounted for 14 per cent of global GDP.

Japan was No. 3, Germany was fourth and India came in fifth, with more than 4 per cent of total world output.

"These results are more statistically reliable estimates," the World Bank said in a statement. "It was the most extensive and thorough effort ever to measure PPPs across countries."

But World Bank President Robert Zoellick said the new figures would have no major policy implications.

Purchasing-power parity, which the World Bank and other international bodies use to give a fairer comparison of countries' relative economic strengths, makes allowances for the different prices of services and goods across countries, without distortions caused by exchange rates.

Mr. Zoellick explained that previous PPP estimates for China were based on price data collected by "very rough surveys" in the 1980s, which had made goods and services seem cheaper than they actually were.

But he warned that even the new data isn't perfect because they only reflect prices in cities - not the vast areas of rural China. And he said it's too early to determine if the revised data would serve as a better measure of levels of poverty and development in China and elsewhere.

Mr. Zoellick said the relative price of a basket of goods was a better indicator of poverty levels than calculations made using GDP because the poor spend a higher proportion of their income on food.