Is China now the world’s largest economy?

by on May 1, 2014 at 8:53 am in Current Affairs, Data Source, Economics | Permalink

Christopher Ingraham at The Washington Post has a good short piece on this:

Is China’s economy really set to overtake the United States this year, as manynewsoutletsreported Wednesday morning? Not exactly.

Those headlines come from a new World Bank report that looks at the  purchasing power parities (PPP) of world economies. It’s a way of standardizing GDPs across different currencies and economies by “the number of units of a country’s currency required to buy the same amounts of goods and services in the domestic market as U.S. dollar would buy in the United States,” according to the Bank’s definition.

On that measure, China is looking pretty good. As of 2011 (the latest year data are available), its GDP stood at about 87 percent of the U.S. GDP, or 15 percent of the world’s total economic output. This is a huge increase from 2005, when China’s economy was less than half the size of ours.

But there’s a reason that standard measures of GDP don’t use the PPP conversion. As the Wall Street Journal’s Tom Wright explains:

“China can’t buy missiles and ships and iPhones and German cars in PPP currency. They have to pay at prevailing exchange rates. That’s why exchange rate valuations are seen as more important when comparing the power of nations.”

Standard GDP measures take these exchange factors into account. And here, China is doing about as well as one would expect. They’re still the world’s second-largest economy, but their GDP is less than half the size of the U.S. GDP.

This piece is also a good example of just how much economics and financial journalism has improved, post-blogosphere.

Brian Albrecht May 1, 2014 at 9:00 am

I know people love reading stuff on the US economy vs Country “X.” But we must keep in mind that it is not a competition and that surpassing another country on one measure is just as arbitrary a line as “$10 trillion.”

XVO May 1, 2014 at 11:05 am

You don’t think there is a competition for global dominance? And you don’t think that the basis of geopolitical power is the economy?

The Anti-Gnostic May 1, 2014 at 12:06 pm

Bigger does not equal better. There are plenty of nation-states with smaller GDP’s than the US, Russia or China who are quite secure with their place in the world. There are significant costs to keeping a hegemony propped up and historically every single one has failed over time.

In my discussions with people from Europe, the Middle East and South America, they opine that the US has traded places with the former USSR, in the perception of a blundering, ham-fisted behemoth, stumbling all over the world causing problems.

Domestically, the USG browbeats and bullies its citizens over how they must endlessly accommodate everybody else in the world who comes here. Internationally, the USG tells the world either they toe the US line or get ready for the drone attacks.

In other words, the USG is just an out-of-control bully which despises its own citizens and is trying to take over the planet. Eventually somebody is going to take a shot at us, and the country has become too pluralistic to win that kind of war.

XVO May 1, 2014 at 3:16 pm

I agree with most of what you are saying. I’d only niggle that bigger in the case of the USA has equaled better, at least as far as it’s ability to control world events and shape history. GDP is important and it is where the USA draws it’s power. The smaller states are secure as long as they do not interfere with the United States, US allies or get in the way of US goals. The modern US enforces relative stability in much of the world.

JWatts May 1, 2014 at 6:26 pm

“. The modern US enforces relative stability in much of the world. ”

Indeed, it does. Even the bipolar relationship between the US/NATO and the USSR enforced relative stability. It’s unclear where the world is headed in that regard.

Curt F. May 1, 2014 at 12:10 pm

One small component of global geopolitics may be a race to be the wealthiest of nations. But looking solely at national GDP ignores several other important considerations. First, GDP per capita is just as important, if not moreso, than pure GDP. Second, China’s GDP and America’s GDP are probably not independent. Increases in theirs leads to increases in ours. Free trade permits mutually beneficial transactions after all.

XVO May 1, 2014 at 3:27 pm

Remove the USA then consider a war between Taiwan vs China, who wins? GDP per capita is purposeful for social stability, and very important for individuals. But, I think this scenario effectively highlights that GDP per capita is not more important geopolitically than GDP (which funds a nations military and allows a nation to better weather a war).

American and Chinese GDP are certainly not independent, I agree, and it would be severely damaging to both to enter a war. This means that it would take a very large provocation to lead to a war not that the relative economic power of the two states is meaningless.

Floccina May 1, 2014 at 12:35 pm

@XVO We have allies you know.

XVO May 1, 2014 at 3:33 pm

Yes, but how does that make GDP meaningless in comparing nations geopolitical capabilities? Militaries are funded by a nation’s GDP. The USA dominates it’s allies because of it’s relative power.

JWatts May 1, 2014 at 6:28 pm

“@XVO We have allies you know.”

Austria had allies in 1914 and Poland had allies in 1939. Allies don’t stop wars from happening.

Floccina May 1, 2014 at 12:33 pm

+1000
Same goes for healthcare and schooling and a lot of other things. So what we are low on the PISA tests, do them measure anything important anyway, I think not, and from what I heard on an NPR interview the USA has done disappointingly on those test from when they started them.

JWatts May 1, 2014 at 6:34 pm

The US isn’t “low on the PISA tests”. In 2012, the US ranked 29th out of 65. That’s middle of the pack. We ranked better than say, Iceland or Sweden or Israel, and yet I never hear much in the way about their poor performance.

Brandon Berg May 1, 2014 at 9:13 am

I’m still somewhat confused on this point. PPP-adjusted GDP is a better measure of total production and standard of living (when expressed in per capita terms), is it not?

It seems to me that the standard (exchange rate) GDP is subject to distortions due to fluctuations in the value its currency, and also is heavily influenced by foreign trade, which is a relatively small part of most economies.

What exactly does the exchange-rate GDP tell us, and when is it preferable to the PPP measure?

F. Lynx Pardinus May 1, 2014 at 9:43 am

I think “GDP (PPP) per capita” is useful in measuring “citizen’s standard of living,” and “GDP (nominal) total” is useful in measuring “country’s economic power.” The US does pretty well on both of these measures.

matthew May 1, 2014 at 9:52 am

Yes. I don’t know why Cowen highlighted this piece. PPP is the correct way to measure the size of an economy. That china’s currency is undervalued does not mean they aren’t proving more goods and services than the US. We finally got the media using the correct conversion, and it’s very frustrating when economists confuse the issue like this.

J May 1, 2014 at 11:41 am

I continue to be amazed at how obtuse libertarians can get when it comes to foreign policy. Folks, the reason we care about China’s total GDP is because total GDP translates into military power, and the Chinese government has not been shy about its intention to…let’s say “disrupt the status quo” in the Pacific after its so-called Century of Humiliation. This has very serious national security implications for the US and NATO more broadly.

But don’t worry, Bryan Caplan assures us that as their incomes grow the Chinese will become a bunch of pacifist cowards like he proudly proclaims to be. I really don’t think he appreciates just how much the post-WW2 and especially post-Cold War peace has depended on US/NATO military supremacy.

Peldrigal May 1, 2014 at 1:55 pm

GDP is a good measure, but it does not translate directly into military power. The URSS bankrupted itself to mantain armament parity with the USA, and is widely understood that China’s army would have serious difficulties facing any country of an industrialized country, even if it has the second economy in the world. You cannot reduce such things to one indicator.

J May 1, 2014 at 4:08 pm

Of course. Nobody is suggesting that GDP is the exact same thing as military power, but total GDP (or to be more specific, some measure of “industrial” GDP) is the bucket from which military power is drawn. The USSR collapsed because they were trying to draw $X hundred billion worth of military spending out of a bucket that was just not big enough to support that.

So of course the fact that China’s GDP is (maybe) bigger than ours doesn’t mean that suddenly they would prevail in a conflict, but it means that as their GDP continues to grow to become, say, 1.5x or even maybe 2x ours, their ability to tap the spigot on that bucket and ramp up their military capabilities when they so choose becomes much much greater.

J May 1, 2014 at 11:43 am

Oops didn’t mean to put this here.

Douglas Knight May 1, 2014 at 12:16 pm

Total GDP PPP is stupid.

Why are you looking at aggregate GDP at all? Once you have an answer to that, you’ll be able to figure out what kind of GDP to care about.

PPP is about things you cannot import, like haircuts and land. Yes, China has more haircuts than any other country. So what? Nominal GDP is about traded goods and how one country affects the world economy. China is rich enough in an aggregate sense to import lots of steel and determine the world price.

Z May 1, 2014 at 9:22 am

In other news, the American middle class continues to collapse. Canada now seems like the place to be if you are a middle-class English speaker.

http://www.nytimes.com/2014/05/01/upshot/canadians-have-plenty-of-concerns-but-also-a-sense-theyre-better-off.html

Maybe open borders is the way to go. After all, it is working for Canada…

wiki May 1, 2014 at 9:43 am

If only the US would adopt Canadian immigration rules, which favor having college degrees or advanced skills over family reunification! That would do a lot to redress some of the distortions in favor of low end immigration of the US system.

Finch May 1, 2014 at 9:49 am

While it’s not perfect, the Canadian system (which maintains pretty high levels of immigration) is a dramatic improvement over the American system.

Practically, though, Canada doesn’t share a border with a major source of low-skill immigrants. That makes things easier. If Canada and the US were flipped geographically, presumably it would be Canada with the illegal immigration problem. And much of the problem with family unification rules comes as a long-term consequence of illegal immigration.

Rahul May 1, 2014 at 10:06 am

The geographical factor is valid. But in addition we cripple ourselves by having a crappy legal immigration (i.e. skilled) policy. They should be fixed independently.

Finch May 1, 2014 at 10:09 am

Having gone through it, I’m in complete agreement.

The Anti-Gnostic May 1, 2014 at 12:29 pm

I don’t know about that. However skilled all these foreigners may be, they apparently still haven’t figured out how to use Skype or e-mail.

Rahul May 1, 2014 at 12:53 pm

@Anti-Gnostic

If only dumb foreigners from Denmark, Sweden or god forbid Estonia could design something like Skype.

Rob42 May 1, 2014 at 10:24 am

It would certainly be better than our de facto immigration policy, which strongly favors the immigration of unskilled labor.

Chip May 1, 2014 at 10:30 am

Only 1 in 5 Canadian immigrants are actually skilled. The rest are family members.

Immigrants are considered one of the three poorest demographics by he Canadian govt along with Aboriginals and single mothers. The Fraser Institute recently calculated that immigration costs the country over $20 billion a year.

Canada had growing problems with immigration.

Finch May 1, 2014 at 10:41 am

It’s certainly not a perfect system. For example, Canada’s immigration rate is probably too high. Assimilation (which isn’t as popular a goal in Canada as it is in the US anyway) is becoming difficult.

But the children of a medical doctor immigrant are more likely to become high skill than the children of a day laborer immigrant. When you think about immigration, you need to think about the shocking amount of money you have to earn over a lifetime in the US in order to pay for the government you receive.

Z May 1, 2014 at 11:26 am

“Assimilation” is certainly not a goal in the US. Quite the opposite. Diversity is our strength and all that.

Finch May 1, 2014 at 11:42 am

It depends on who you ask. But it’s clearly a less important goal in Canada, where contrast is regularly drawn to the American “melting pot.” Despite that, Canada still seems to do a better job assimilating than the US, probably because of the specific immigrants it lets in.

Rahul May 1, 2014 at 12:01 pm

@Z

Assimilation perhaps isn’t as big a goal in the US because it already happens decently well. contra, say, Germany or France. Dunno what nations assimilate incomers better than the US does.

JWatts May 1, 2014 at 6:39 pm

“because it already happens decently well. contra, say, Germany or France.”

I have read about some of the fairly severe issues France was having with assimilation, but I wasn’t aware that was the case in Germany. Is it?

Rahul May 2, 2014 at 12:38 am

@JWatts

Not the same magnitude but similar features. e.g. Germans have their Turkish assimilation problem. Even for skilled, wealthier, “non-problem” immigrants fitting into the tight knit German circles / community is very hard. I’ve met several (white) Americans who after living in Germany for a decade still complain about feeling an outsider.

QWERTY May 1, 2014 at 11:02 am

If only they had OPEN BORDERS, then there wouldn’t be any problems at all.

The problem is not the immigrants, but that there are to few of them.

Right?

chuck martel May 1, 2014 at 10:06 am

A rational person located anywhere wouldn’t care what the size of the Chinese economy is compared to some other economy. It’s not a basketball game. After 48 minutes one nation doesn’t get a prize for producing better statistics than another. Sweden and Norway are ranked very close to one another in GDP, as are Colombia and Venezuela. Do the citizens of one worry a lot about their standings in the GDP contest? Not if they’re sane.

F. Lynx Pardinus May 1, 2014 at 10:38 am

It’s the economist’s version of team sports. You pick a team (Singapore, in the case of this blog) and root for it.

Ray Lopez May 1, 2014 at 10:38 am

Regardless, as a 1%er, I will continue to do more than my share to increase the GDP.

chuck martel May 1, 2014 at 6:05 pm

Increases in GDP don’t correlate with increases in blog comments.

JWatts May 1, 2014 at 6:41 pm

“A rational person located anywhere wouldn’t care what the size of the Chinese economy is compared to some other economy.”

My guess is that a rational person from Taiwan would find your statement obtuse. Relative economic power tends to effect relative political power and powerful countries sometimes absorb less powerful countries. Tibet comes to mind.

chuck martel May 2, 2014 at 1:15 am

You’re implying that another country or countries should do things to negatively affect the Chinese economy so that they can’t exert control over others. What sort of tactics would you suggest? If you don’t have any, then what?

You are correct about powerful countries absorbing less powerful ones. Hawaii was once an independent republic.

JWatts May 2, 2014 at 7:04 pm

No, I’m not implying that “another country or countries should do things to negatively affect the Chinese economy”. I’m saying another country would do well to “care what the size of the Chinese economy is compared to some other economy”. And perhaps ensure that they have the proper defenses and/or alliances to counteract any growing disparity in power.

Urso May 1, 2014 at 10:41 am

Last sentence is quite the non sequitur.

John Schilling May 1, 2014 at 10:59 am

About 80% of China’s missiles, ships, smartphones and cars are purchased from Chinese manufacturers, in Yuan. Wright is going to have to clarify exactly why he thinks only exchange rates and foreign-currency purchasing power matter.

awp May 1, 2014 at 11:07 am

Why does anyone care about GDP? I’d rather live in Monaco than China.

wiki May 1, 2014 at 11:23 am

Well now that China is getting aggressive about territorial disputes, the Japanese are noticing how much military that GDP buys even if the Chinese peasant is still mostly dirt poor.

David K May 1, 2014 at 11:32 am

But you pay for the military in local currency, right? Contra the author, the Chinese I assume are perfectly capable of building their own missiles and ships by this point and paying in local currency, even if they need to buy the raw materials from elsewhere.

Peldrigal May 1, 2014 at 2:09 pm

Of course. You can pay for defense in local currency for local products of local expertise. Enjoy your J-10

mulp May 1, 2014 at 11:17 am

Quoting WSJ:
“China can’t buy missiles and ships and iPhones and German cars in PPP currency. They have to pay at prevailing exchange rates. That’s why exchange rate valuations are seen as more important when comparing the power of nations.”

Well, that’s a sign the WSJ has been populated with idiot editors since Murdock.

China makes its own missiles, makes all the iPhones and requires German automakers to manufacture in China.

China makes its own missiles with Chinese wages while the US buys its missiles increasingly from nations with wages halfway between the US and Chinese wages. One of the heavy lift rockets used by the US military is powered by a Russian manufactured engine based on commie designs from the space race. I’m sure China was able to buy commie manufactured rocket engines which were matches for the US rocket engines.

The presumption of the author of that statement is American Exceptionalism as uninformed arrogance and hubris typical of conservatives who think the world is static unless conservatives are changing things (and everyone outside the US is a leftist).

Finch May 1, 2014 at 11:39 am
Al May 1, 2014 at 12:24 pm

The Chinese don’t need to buy an Apple branded iPhone. No one else in the world can make iPhones as well as the Chinese can. It stands to reason that they are uniquely capable of producing inexpensive knock offs as well.

JWatts May 1, 2014 at 6:45 pm

“the US buys its missiles increasingly from nations with wages halfway between the US and Chinese wages ”

No it doesn’t. Virtually all US missiles are produced in the US.

“One of the heavy lift rockets used by the US military”

Space rockets are not the same as military missiles.

rjs May 1, 2014 at 11:21 am

imported missiles and ships and iPhones and German cars have nothing to do with GDP, which is the output of goods and services produced by labor and property
located in China…that’s why using PPP is an apples to apples comparison

imports are subtracted from GDP, tyler, which i’m sure you know…

Eric May 1, 2014 at 11:33 am

Don’t be so sure, economy is pretty much a faith based subject.

J May 1, 2014 at 11:42 am

Oops this was not supposed to be a reply but whatever.

I continue to be amazed at how obtuse libertarians can get when it comes to foreign policy. Folks, the reason we care about China’s total GDP is because total GDP translates into military power, and the Chinese government has not been shy about its intention to…let’s say “disrupt the status quo” in the Pacific after its so-called Century of Humiliation. This has very serious national security implications for the US and NATO more broadly.

But don’t worry, Bryan Caplan assures us that as their incomes grow the Chinese will become a bunch of pacifist cowards like he proudly proclaims to be. I really don’t think he appreciates just how much the post-WW2 and especially post-Cold War peace has depended on US/NATO military supremacy.

Thorfinnsson May 1, 2014 at 12:13 pm

Every American who writes that China’s increasing GDP is mutually beneficial, as well as every American who supported open trade with China ever, should be lined up and shot.

chuck martel May 1, 2014 at 1:27 pm

“the Chinese government has not been shy about its intention to…let’s say “disrupt the status quo” in the Pacific”

Maintaining the status quo in the Pacific is closely akin to combating global warming. Nothing stays the same forever, including China’s place in the world community. Once the Romans ruled the known world (that part known to the Romans anyway), and later the British Empire controlled much of the planet in some ways. They don’t anymore. Should we be really unhappy that the status quo changed in the year that the legions left Britain?

Peldrigal May 1, 2014 at 2:10 pm

We may aren’t unhappy. Contemporaries were a bit.

Ben Milner May 2, 2014 at 3:56 am

China seems pretty hungry to get back on top. A western worker expects at least $25 bucks an hour to do a half-arsed job; a Chinese worker will do an excellent job for $3 bucks an hour, if he even expects a wage at all. I think China will take over, they just want it more – they manufacture everything, they’re cheap, and they have a space program.

Axa May 2, 2014 at 7:09 am

If a low salary is that important, Mexico’s workforce is cheaper, younger and closer to the US.

Brenton May 2, 2014 at 9:06 pm

“an excellent job for $3 an hour” != “a job for $3 an hour”

Thorfinnsson May 2, 2014 at 12:26 pm

Well Bill, I’m sure you’re delighted that Tyler Cowen is working on reducing US workers to that wage level. But I’m sure our new Chinese overlords will look kindly upon you for your obsequious flattery of that Leninist gangster imperium.

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