China's Economy Bigger than the USA's. Now?

China’s Economy Bigger than the USA’s. Now?

Is China’s Economy Bigger than the USA’s…Now?!

From the Petersen Institute of International Arvind Subramanian

Some time in 2010 the Chinese economy overtook that of the United States. My calculations of GDP are based on new estimates of GDP that will soon be published by the Penn World Tables (PWT) under the guidance of Professor Alan Heston at the University of Pennsylvania. Arvind Subramanian.

According to the IMF’s latest estimates for 2010, the value of total US GDP was $14.6 trillion while that of China was $5.7 trillion. But it has long been recognized by many economists that using the market exchange rate to value goods and services is misleading about the real costs of living in two countries. Such goods and services as medical services, retail and constructions services, and haircuts—which are not traded across borders—are cheaper in poorer countries because labor is abundant. Using the market exchange rate to
compare living standards across countries understates the benefits that citizens in poor countries enjoy from having access to these goods and services.

Purchasing power parity (PPP) estimates—which take account of these differing costs—are an alternative and, in some respects, more revealing way of computing and comparing standards of living and economic size across countries.

The size of the Chinese economy in 2010 was about $14.8 trillion dollars—surpassing that of the United States.

A second correction relates to [the fact that when] a currency appreciates, the movement is akin to an increase in the average cost of living.

These two adjustments increase China’s GDP from the current estimate of $10.1 trillion to $14.8 trillion (an increase of 47 percent, of which 27 percent is due to the revision in the 2005 estimate, and the rest due to smaller-than-assumed increases in the cost of living between 2005 and 2010). This $14.8 trillion figure exceeds US GDP of $14.6 trillion.

The GDP per capita (the average standard of living) is now about 4.3 times greater in the US than in China compared with a multiple of 6.3 without my corrections (and compared with a multiple of 11 if GDP is computed using market exchange rates).

[One] explanation of China’s behavior [in failing to provide more accurate estimaes] has to do with exchange rate politics. Had all prices been collected, China’s average price level (cost of living) would have been substantially lower. And this would have resulted in estimates of undervaluation of the Chinese currency of close to 40 percent against the dollar (see Subramanian 2010 for the connection between China’s price level and the implications for estimating whether currencies are under or overvalued). China’s trading partners would have had additional technical ammunition to deploy against its highly sensitive but demonstrably beggar-thy-neighbor exchange rate policy.

Economist Simon Taylor – finance professor and director of the finance program at Cambridge (and former JPMorgan and Citigroup alum) –writes:
The forecast [from the] Peterson Institute of International Economics [argues] that Chinese economic output already matched that of the US in 2010 (at purchasing power parity – more of that below). And, more dramatically, that the renminbi could overtake the dollar far more quickly than generally expected
If the new report is even roughly accurate, China’s real economic output overtook that of the US several years ago. Even if it’s still somewhat inaccurate, the timing of when China is number one is now imminent, not some next-decade event.

Arvind Subramanian, former assistant director in the Research Department of the International Monetary Fund, and now senior fellow at the Peterson Institute for International Economics – noted in January:

3 thoughts on “China’s Economy Bigger than the USA’s. Now?

  1. Chris Devonshire-Ellis

    I think you need to consider thst China is a closed economy and the Chinese can only really spend money in China, there’s nowhere else to put it. Hence property bubbles for places costing millions but made very poorly, and huge expenditure on luxury goods with no instrinsic lasting values. The country is very poorly integrated into global economics, while the US is still streets ahead.


  2. Godfree Roberts

    I’m not sure about it being poorly integrated. It’s the #1 trading partner for most countries, its currency is used by 22 of those partners, with more being added each month, and the renminbi is increasingly used as a reserve currency.
    I think it’s more accurate to say that the integration is still in an earlier stage than longer-established traders like the USA and the UK.


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