The BRIC grouping refers to Brazil Russia India China. This term was first coined by Goldman Sachs in about 2001. In the year 2008 the economies of the G7 stood at about $32.96 Trillion vs $ 8.87 Trillion of the BRIC, which is about 26% size of the G7. However, economists often talk of the economies of the BRIC countries in terms of PPP, or Purchasing Power Parity to demonstrate the relative strengths of these economies. Thus for the same period 2008 in PPP terms the G7 stood at about $29.1 Trillion vs $ 15.37 Trillion for the BRIC , which is about 52% size of the G7. A table highlighting the figures along with export import figures is given below:
What is the PPP theory? This is a theory which equalizes purchasing power of currencies in the home currency for a given basket of goods or services. This is used to calculate relative living standards. For example the average doctor’s fee paid for a single consultation in India would be lower then for a similar consultation in the US. Similarly the rent of an apartment in India would be lesser then that in the US. So the PPP will factor in the lower cost of services and adjust to show the relative strength as per the local currency. So if the factor of conversion is 3, then it would mean that a person earning $1000 in India is as well off as a person earning $ 3000 in the US.
The problem with this theory is to decide which basket of services to select. Should it be food, medical costs, transportation, or entertainment etc? This is because the proportion of relative cost would be different in different countries for different services or products. So the consultation fees for a doctor in the US might be 3 times costlier then that in India. However if one was to buy say, a Sony 42inch LCD screen, the cost would probably be the same, in fact it may even be more in India as the local taxes would be higher in India.
Now look at the ratio of exports of the BRIC vs G7 in dollar terms and PPP terms. The effects of lower exports in PPP terms would be perceived to be lower. However in trade you need to pay in actual dollar terms and not some relative terms. In the present economic crisis the slow down of exports would in effect probably hit the BRIC countries more especially China and Russia. So their ability to have a positive impact on the world economy instead of being more may actually be less. Russia would be hard hit by drop in Oil prices while the Chinese economy is already facing huge factory closures due to drop in exports to the US and European markets. Negative exports would have implications for imports as well further dampening global trade.
So I believe the BRIC groupings effects on international trade been exaggerated and the resultant effects on powering the world economy in this economic downturn is misleading. Part of this is due to the illusion of PPP calculations.
Now look at the ratio of exports of the BRIC vs G7 in dollar terms and PPP terms. The effects of lower exports in PPP terms would be perceived to be lower. However in trade you need to pay in actual dollar terms and not some relative terms. In the present economic crisis the slow down of exports would in effect probably hit the BRIC countries more especially China and Russia. So their ability to have a positive impact on the world economy instead of being more may actually be less. Russia would be hard hit by drop in Oil prices while the Chinese economy is already facing huge factory closures due to drop in exports to the US and European markets. Negative exports would have implications for imports as well further dampening global trade.
So I believe the BRIC groupings effects on international trade been exaggerated and the resultant effects on powering the world economy in this economic downturn is misleading. Part of this is due to the illusion of PPP calculations.
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