Understanding Why China Isn’t Taking over US as the World’s Largest Economy… Yet

kent brockman china

I, for one, welcome our new economic overlords. I’d like to remind them that as a trusted Internet personality I could be helpful in rounding up others to toil in their prison camps!

 

 

So last week many, many, MANY news outlets reported that China was going to overtake the US as the world’s largest economy later this year based on a recent World Bank report from their International Comparison Program (IPC). Here’s a visual representation of every economist that read the headlines last week.

 

After enough people chimed in with a more nuanced view on the matter (ie calling bullshit), the other news outlets, to their credit, started to look at the story more carefully. So why did everyone jump the gun? What stat got everyone so anxious to declaring allegiance to their new economic overlords?

 

Well the question is, you down with the PPP?

 

 

Some People are Just Down with Them PPPs

The thing that got everyone in a tizzy was a stat that the World Bank released in their Purchasing Power Parities and Real Expenditures of World Economies report. In the report, they claim that China would overtake the US by the end of this year if GDP (Gross Domestic Product) is based on PPP measurements. So what the hell is PPP?

 

Well, PPP stands for Purchase Power Parity. Essentially it’s an economic measurement technique used to determine the relative value between countries. In laymen’s terms, it’s an economic number that can be used to compare two countries’ economies. So based on the World Bank’s PPP estimate, China is (1) a much larger economy than most experts had originally expected and (2) will overtake the US as the “world’s largest economy” later this year.

 

So if you were to base China and US economies on this PPP scale, then yes, China would be the world’s largest economy by the end of this year. The problem lies in that basing GDP on PPP measurements can be somewhat misleading.

 

 

So You’re Telling Me One is More Broken Than the Other…

Comparing two economies, like China and the US, can be a bit tricky regardless of what economic measurement you use. Using the regular GDP estimates, that means basing a country’s gross domestic product into U.S. dollars at market exchange rates, China is less than half the size of the US economy. Yet if you were to use the PPP estimates, then US and China are about even keel, with China’s economy growing by the day set to overtake the US.

 

Here's a visual representation for you, if the tapestry I created with my words aren't good enough for you. #WellWhoNeedsYou!

Here’s a visual representation for you, if the tapestry I created with my words isn’t good enough for you. #WellWhoNeedsYou! (Photo Credit: Washington Post)

 

While there are some economists that say comparing two countries’ economies through regular GDP estimates can be misleading – doesn’t take in fluctuating exchange rates or doesn’t account for countries undervaluing their own currency – this is still a better measure than using the PPP standard. As Tom Wright of the Wall Street Journal explains, exchange rates matter when comparing the economies of two nations. China, for its impressive economic prowess, can’t buy things like iPhone, expensive German cars, and bootleg-ass electronics through just PPP currency rates. All goods always have to take exchange rates into account. Hence why most organizations value the regular GDP estimates more than PPP.

 

 

Thanks, But No Thanks!

But the real kicker here, China doesn’t even want the title of the world’s largest economy! Based on a report by the Financial Times, China wanted to throw out the World Bank report. They were worried of the economic implications and responsibilities that being the world’s largest economy brings. While that could easily be a valid reason – China is still relatively poor based on economic activity per person – there have also been reports in the past of China fudging their GDP statistics. Which if China were to become the new economic standard and if they were in fact inflating GDP numbers, well that could cause some SERIOUS problems to the world economy. Regardless, call China the world’s largest economy all you want, CHINA DON’T CARE!

 

Now don’t get us wrong. China is still a growing economic power, by any estimate, and currently a strong number two overtaking Japan in 2010. So saying it will never happen is incredibly short sighted. But for right now, let’s all take a deep breath and relax. After all, we have to keep our best Kent Brockman impression in handy for 2020. You know, just in case.

 

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