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  • Writer's pictureRealFacts Editorial Team

Global GDP Might be $7 Trillion Higher Than We Think: Global and American Spending

Updated: 1 day ago


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The Discovery of $7 Trillion Through Purchasing Power Parities (PPPs) 


On May 30th, the World Bank revealed a significant discovery in global GDP after examining economic data from 176 countries. The World Bank discovered almost $7 trillion dollars worth of Global GDP that wasn't calculated, this means that global spending can stretch further than we thought. This change arises from revising how GDP is calculated using purchasing-power parities (PPPs) instead of market exchange rates, and will now likely be calculated in GDP going forward. 


To understand this, a simplified example using tacos is helpful. Let's imagine that the whole world economy only produced one thing, tacos. For instance, America might value and buy tacos at $4 USD, whereas mexico might value it at 20 pesos. When converted to US dollars at the market exchange rate (18.44 pesos to the dollar), Mexico’s tacos appear significantly cheaper at $1.08. Thus, even if both countries produce the same number of tacos, Mexico’s output seems 73% smaller using conventional GDP measures. 


The solution is to use PPPs, which equalize the price of goods and services across countries, “that compare different countries' currencies through a “basket of goods” approach… PPP is the exchange rate at which one nation’s currency would be converted into another to purchase the same amounts of a large group of products.” Using that knowledge in our example. If the peso price of tacos is about 3.704 times the dollar price, (3.704 = 4/1.08). Mexico’s GDP should be converted using a rate of 3.704 pesos to the dollar. This would make tacos valued in America and Mexico equivalent, and we can better see the total quantity of tacos produced between each country. 


How Does This Affect Global Economies? 


The World Bank, through the International Comparison Programme, periodically collects prices of numerous items worldwide to adjust GDP calculations using PPPs, among several baskets of goods. The latest findings show that prices globally are about 4% cheaper than previously thought, revealing that global spending power in 2022 was $174 trillion, which is $7 trillion more than earlier estimates.


This newfound buying power is unevenly distributed. India gained $1.1 trillion, making it the third-largest economy by PPP. Russia's economy grew by $660 billion, surpassing Japan, which has implications for the ongoing conflict with Ukraine. Ukraine's economy increased by $118 billion, a substantial boost given its current challenges. China's economy benefited the most, gaining $1.4 trillion, making it 25% larger than America's in 2022 using PPPs, although it remains smaller by market exchange rates. However, China’s per capita GDP ranks 85th globally, and its consumer spending is relatively low due to high saving rates. 


Slowing Consumer Spending and Rising Debt 


Shifting focus to the American economy, consumer spending, which powered GDP growth during the pandemic, is showing signs of slowing. Monthly growth in consumer spending fell from 0.7% in March to 0.2% in April, with overall spending shrinking in real terms. Retail sales are weakening, and brands like McDonald's and 3M are noticing a decline in customer spending. Recent data has led the Atlanta Fed to lower its GDP growth prediction for the second quarter to 1.8%. 


Credit card data illustrates the growing financial strain on American households. Pandemic-era savings have dwindled, leading more people to rely on credit cards, with many struggling to repay debts. TransUnion reports that 440,000 credit-card holders have been downgraded to subprime status since April last year, with delinquency rates reminiscent of 2011 levels. Car loan repayments are also faltering, pushing some to sell their vehicles, as evidenced by a 6% rise in used-car listings in May. 


Florida, particularly Miami, is a hotspot for financial distress. The state has high delinquency rates, and payday lenders like ACE Cash Express are seeing fewer loans due to increased competition. WalletHub predicts Miami residents will take longer to repay credit card debt than anywhere else in the country. 


Settlement on American Expenditures 


Despite these challenges, some analysts remain optimistic. Eric Wallerstein of Yardeni Research views rising delinquency rates as a return to normal rather than a crisis. Banks are increasing credit limits faster than customers are using their balances, and delinquency rates are lower than in past decades. Many Americans, particularly those with high incomes and long-term fixed mortgage rates, remain financially secure. Rising asset prices, such as a 12% increase in the S&P 500, also benefit wealthier households. 


The key concern for the overall economy is whether struggling consumers will affect broader spending trends. Continued spending relies on higher incomes, and while employment remains strong and inflation appears to be easing, the future depends on maintaining income growth to offset weakened household balance sheets.

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