Big Trouble for Big China

Comments Off on Big Trouble for Big China
Big Trouble for Big China

The International Monetary Fund’s most recent “World Economic Outlook” estimates that China’s GDP, on a Purchasing Power Parity basis, will exceed the comparable figure for the U.S. in 2014 by 1.2 percent. According to IMF data, in 2013 the U.S. produced 3.8 percent more economic output than China’s economy.1

However, since China is expected to grow by 9.2 percent on a Purchasing Power Parity (PPP) basis this year compared to 3.9 percent growth for the U.S., China’s economic output will move ahead of the U.S. by $216 billion. By next year, the IMF estimates that China’s GDP will grow by another 9 percent and exceed U.S. GDP by more than 5 percent—or almost $1 trillion—on the same basis.

Based on these estimates, the U.S. has officially lost its status as the world’s largest economy, a position it has held going back to 1872, when the U.S. economy first surpassed the UK’s.

What is Purchasing Power Parity? The simple logic is that prices aren’t the same in every country. While a typical person in China earns a lot less than the typical person in the U.S., simply converting a Chinese salary into dollars underestimates how much purchasing power that individual has and, therefore, that country has. So the IMF measures GDP in market-exchange terms as well as in terms of purchasing power.

PPP is a great metric when used for the right purpose. But, purchasing power parity is only about purchasing power and quality of life, not the strength of an economy.

As Derek Scissors at the American Enterprise Institute observes, “It does not make any sense to compare one country’s PPP-adjusted GDP to another and say its economy is larger. Not for any country at any time.”2

Obviously, when we aggregate the purchasing power of people in the U.S. versus the people in China, it’s easy to lose perspective. Why? Because China has over four times as many people as the United States. So, while the aggregate number may be comparable, Chinese GDP per capita, even on a PPP basis, remains quite low by Western standards.

To put it in perspective, consider this: University of Michigan professor Mark Perry calculates that the U.S. reached the level of GDP per capita we see today in China back in 1940, at the end of the Great Depression.3

What does that mean? Even in the unlikely event that China’s per-capita GDP continues to grow at its current rate of about 8 percent per year, it will take another 30 years for China’s per-capita GDP to reach the level we see in the U...

To continue reading, become a paid subscriber for full access.
Already a Trends Magazine subscriber? Login for full access now.

Subscribe for as low as $195/year

  • Get 12 months of Trends that will impact your business and your life
  • Gain access to the entire Trends Research Library
  • Optional Trends monthly CDs in addition to your On-Line access
  • Receive our exclusive "Trends Investor Forecast 2015" as a free online gift
  • If you do not like what you see, you can cancel anytime and receive a 100% full refund