Is China now the world’s largest economy?

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.


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