World Economy

Is China the World’s Biggest Economy?

Is China the World’s Biggest Economy?Is China the World’s Biggest Economy?

China has officially overtaken the United States economy, becoming the largest economic power in the world. According to the newly released data by the International Monetary Fund, when national economic output is measured in “real” terms of goods and services, China will produce $17.6 trillion by the end of this year with the United States coming in at $17.4 trillion in production.

The IMF’s calculations are based on adjustments for Purchasing Power Parity (PPP), which determines the relative value of different currencies by establishing the necessary exchange rate needed to equate the expenditure on similar commodities in both countries. Using PPP measurements decreases the effect of exchange rate fluctuations and allows for the calculation of real output. Measured in real PPP terms, China now accounts for 16.5% of the world’s economy, compared to 16.3% for the U.S.

But is this really a true measure of their economic power? The US economy is still about 80% larger than that of China when looking at market exchange rates. This can be owed to the Chinese desire to maintain a cheap currency so as to more easily export their goods.

Although China displayed very impressive average growth record, at 10% per year, the United States can still be considered the biggest economy without the adjustments made for purchasing power as China continues to be behind the United States in terms of market value of their currency by $6.5 trillion. Not to mention the fact that that same IMF data lists China 89th on a list of 187 countries with a GDP per capita of $11,868. Of course, with a GDP per capita of $53,000 the US is ranked much higher.  

Ultimately, the problem here is that trying to compare the economies of China and the United States is like comparing apples and oranges. China’s economy, as mentioned, is growing at a much faster rate than the US. China has also become the leading foreign owner of US debt, which has now surpassed $18 trillion. China is thus subsidizing much of the American growth currently taking place. Finally, much of the Chinese GDP has been funded by credit and loans, much of which has not been paid back.

Hence, it seems that comparing two economies based on one criterion is not appropriate.