China’s Day Never Came

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China’s Day Never Came

A February 2017 report from the global professional services firm PwC projects that by 2050, China will become the world’s largest economy by “a significant margin,” while the U.S. will drop to third place, behind India.1

Specifically, China will increase its share of world GDP to 20 percent between 2016 and 2050, while the U.S. share will fall to 12 percent over the same period.

Is this really likely to happen? Let’s take a closer look.

Notably, the measure that the PwC report uses to represent the size of an economy is GDP at PPP (Purchasing Power Parity). As the report’s glossary explains, GDP at PPP “adjusts for price level differences across countries and provides a better mea- sure of the volume of goods and services produced in an economy.”

On that measure, China surpassed the U.S. in 2014. Currently, its share of global GDP at PPP is nearly 18 percent, compared to the U.S. share of roughly 16 percent.

But according to a different measure, market exchange rates, the United States was 62 percent larger in 2016, while China would be 46 percent bigger in 2050.  And even in PPP terms, GDP per capita for the U.S. economy is four times that of China today, and by 2050, based on PwC’s projections, it will still be twice as large.

That’s significant, because as explained in our November 2014 issue, “PPP is a great metric when used for the right purpose.2  But purchasing power parity is only about purchasing power and quality of life, not the strength of an economy.” 

According to the American Enterprise Institute, “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.”

Meanwhile, China’s GDP per capita, according to research by University of Michigan professor Mark Perry, is now at the same level that U.S. was in 1940.3

As we noted in 2014, “even in the unlikely event that China’s per-capita GDP continues to grow at its cur- rent 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.S. today. By that time, the Trends editors expect U.S. GDP per capita (on a PPP basis) to have roughly doubled.”

Since 2014 China’s growth rate has weakened, so it will take even longer for China to narrow the wide gap between the affluence of the U.S. economy and its own economy. For instance, China’s growth slowed to 7 percent in 2016, which was the lowest rate since 1990, and China’s Premier has already announced that growth will decline even further to 6...

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