China’s economy will exceed the US in terms of size at the end of 2014, according to new data that also show that India is now number three in the world and Indonesia is bigger than Italy.
But it’s all a bit theoretical. These findings are based on new purchasing power parity (PPP) indices published by the International Comparison Program that is hosted by the World Bank. They are designed to improve comparisons of living standards across economies. However, to compare the size of economies, the measure is rather misleading. For this, US dollar GDP is still the best guide. And depending on your assumptions, China may not exceed the US for another decade.
The chart that got people excited uses the newly-created indices to show the Chinese and US economies. By extending the lines, using simple assumptions and the IMF’s forecasts for real GDP growth in both countries, China finally trumps the US in size in 2014. But PPP is useful for comparing living standards across economies, not their relative size.
For that, dollar GDP comparisons are still more relevant. And while China has been catching up on America, the gap is still large. The US economy was about 14 times larger than China’s 20 years ago and is today about 1.7 times bigger. But since China is growing faster than the US, incremental dollar GDP generated by the Chinese economy does now exceed America’s.
So although the US still rules in terms of economic size, China is now comfortably ahead on incremental dollar GDP - and has been since 2007.
The IMF’s projections for incremental nominal dollar GDP this year show that China will add about $120bn more to global demand than the US. Overall, China is adding USD 850 billion, or a full Indonesia, and the US a touch more than Switzerland).
Further down the list, India is also expected to add more dollar demand than Italy to the world economy, and Bangladesh will generate more additional GDP than Vietnam. But this measure has its shortcomings too, as shown by the projected fall in demand from Japan and Australia. Both those economies should grow this year, but because the IMF expects their currencies to fall against the dollar, they will shrink in dollar terms.
Then when will China exceed the US? If the former grows at 7% a year and America at 2% for the foreseeable future, it will take another 10 years before China’s economy is larger. But if its growth falls to 6% and the US economy manages 3%, it will take another 20 years. So, it will happen at some stage – just not this year or next.
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