There are news articles out today reporting on a World Bank affiliated study which indicates that sometime this year the economy of China will surpass that of the US to become the World's largest.
This is something that had been predicted to happen but the estimated date was around 2020. This report moves up the time frame based on new calculations. The above news story and others do a poor job of explaining how the comparisons between national economies are made and what they really mean. I found an article on a Wall St. Journal blog that gives much better background on the issue.
Another way of comparing economies, employed by the ICP, uses a concept called purchasing power parity. PPP exchange rates make adjustments for the differing costs of goods and services across countries. They attempt to show what exchange rates would have to be to buy the same basket of goods in different places.The second column in the above chart are based on GDP adjusted for PPP. It is obvious that it provides different relative rankings than raw GDP alone. The chart is for 2011 data. The World Bank estimates that China will pass the US on this calculation sometime this year.
As with just about anything to do with economics, there is no consensus among economists as to which of these is the best approach. It depends a lot on the questions being asked about economies. So does this have any real importance in practical terms? Is is possible that it does. The Economist is using the report to announce the end of the American Century. That is likely a bit dramatic.
China will use this information in its argument that it should be given a greater voice in the management of the internal financial system. G7 is the world's most exclusive economic club. It was established in 1975. It had been changed to G8 to include Russia which they just evicted over Ukraine. The seven members are US, Germany, Japan, UK, France, Italy and Canada. Looking at the above chart Canada doesn't appear on either table and Italy doesn't make the second one. is a larger group of countries that meets less often and arguably has less clout. China, Brazil and India are included there.
There is also the issue of participation in the governance of the two major global financial institutions the IMF and World bank. They have always been managed as a US/European club. The deal has been that the top job at the bank goes to an American and that at the fund goes to a European. Chinese complaints about these arrangements have are becoming more forceful.
Then there is the issue of exchange rates which distort the use of raw GDP. This observation is from the WSJ article.
“The advantage of using GDP at PPP rates is that it better measures welfare, and also PPPs tend to be more stable and thus the $GDPs of countries (used for international comparisons, etc.) don’t jump around as much,” Markus Rodlauer, chief of the IMF’s China mission, wrote in an email.This is why major bilateral trade deals denominated in non-dollar currencies are becoming more frequent and important. When Russia and China trade directly in rubles and yuan they can agree on their own rate of exchange. They are bypassing the power and control of the international financial system.
But the concept has steep limitations too. 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.
The times they are changing.