California’s Economy
California Governor Gavin Newsom (D) claims that “California has officially overtaken Japan to become the world’s fourth-largest economy.”
IN FACT, Japan’s economy is 56% larger than California’s, and Newsom is using a highly deceptive method of converting Japanese yen into U.S. dollars. Instead of correcting Newsom’s falsehood, the media is amplifying it. Here are the specifics:
- Newsom alleges that “California’s nominal GDP [gross domestic product] reached $4.1 trillion” in 2024, “surpassing Japan’s $4.02 trillion.”
- The figure for California’s GDP is accurate, but the figure for Japan’s GDP is converted from yen to dollars using exchange rates, which “do not provide GDPs that are valued at the same price level” and are “usually misleading on the relative sizes of economies,” as explained by the OECD (Organization for Economic Cooperation and Development).
- Hence, the OECD warns that “exchange rates should not be used to make international comparisons of GDP” because they “do not account for the price level differences between countries and therefore overstate the size of economies with relatively high price levels.”
- In contrast, the OECD states that purchasing power parities (PPPs) “should always be used” to “make international price and volume comparisons of GDP.”
- Using PPPs, Japan’s GDP was $6.4 trillion in 2024, or 58% higher than California’s GDP of $4.1 trillion.
- Underscoring the folly of Newsom’s comparison, the yen/dollar exchange rate has been unusually volatile in recent years and rose by 38% from 2021 to 2024, thus creating an illusion that Japan’s economy shrunk by 20% when it actually grew by 10%.
- Rather than exposing Newsom’s canard, a wide range of media outlets are parroting it, such as CNN, Axios, the Los Angeles Times, Bloomberg, the BBC, Newsweek, The Guardian, and The Hill.
