China’s Economy Surpassed U.S. … a Long Time Ago

This is what’s above the fold on Drudge right now:


(click to see the full image.)

Drudge links to a MarketWatch article stating:

We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.

It just happened — and almost nobody noticed.

The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.

***

To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in real purchasing-power terms, compared with 16.3% for the U.S.

***

These calculations are based on a well-established and widely used economic measure known as purchasing-power parity (or PPP), which measures the actual output as opposed to fluctuations in exchange rates. So a Starbucks venti Frappucino served in Beijing counts the same as a venti Frappucino served in Minneapolis, regardless of what happens to be going on among foreign-exchange traders.

PPP is the real way of comparing economies. It is one reported by the IMF and was, for example, the one used by McKinsey & Co. consultants back in the 1990s when they undertook a study of economic productivity on behalf of the British government.

Yes, when you look at mere international exchange rates, the U.S. economy remains bigger than that of China, allegedly by almost 70%. But such measures, although they are widely followed, are largely meaningless. Does the U.S. economy really shrink if the dollar falls 10% on international currency markets? Does the recent plunge in the yen mean the Japanese economy is vanishing before our eyes?

We reported in 2012 that China might have already surpassed the U.S. in terms of PPP as of 2010.  The same year, China became the world’s largest trader. And in October, we noted that China had officially surpassed America in PPP … citing the same numbers that Marketwatch cited today.

Indeed, the Chief of the World Economic Studies Division in the IMF Research Department (Tim Callen) wrote in 2007:

Who contributes more to global growth, China or the United States? Using PPP it’s China. But using market rates, the United States wins out (see chart).

Who contributed most to global growth?

Notice that he’s using September 2006 numbers.  So China arguably surpassed the U.S. under at least some measures more than 8 years ago.

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