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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.

China poised to overtake US as world's largest economy, research shows

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.

China’s Economy Surpassing U.S.? Well, Yes and No

There is raw GDP stated in US dollars. Gross domestic product is the total value of all goods and services produced by an economy. This is the data that is most often reported. There are a number of reasons why this measurement alone is an unsatisfactory basis of comparing economies. The present status of the US dollar as the world reserve currency tends to exaggerate the size of the US economy in relation to others.
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.

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.

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.

The times they are changing.  

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Comment Preferences

  •  If China wants to be top dog (0+ / 0-)

    it must give up developing nation status.

    That includes coal and Freon 12

  •  eh. let someone else be the big boy (1+ / 0-)
    Recommended by:
    Richard Lyon

    for a change.

    Dawkins is to atheism as Rand is to personal responsibility. uid 52583 lol

    by terrypinder on Wed Apr 30, 2014 at 11:51:20 AM PDT

  •  I can't get the whole thing to load (0+ / 0-)

    this is based on 2011 data, yes?

    China is having a slowdown lately, is why it matters at all. I can understand using various different stats to look at these things from all sorts of angles, but I've always found longterm forecasting like this to be really bizarre.  

    I don't really care who can pee farther, either, but I find the headlines really obnoxious, given that we're constantly being encouraged to fear Chinese economic might (for political reasons, really.) There are so many pieces of subtext for the constant "we're all gonna be overtaken by the Chinese" thing that it's unfortunately never anything but a loaded headline, as far as I'm concerned.

    •  I think that the most significance is shifting (1+ / 0-)
      Recommended by:
      corvo

      power in the international financial system. To the extent that the rising BRICS countries find themselves shut out from having a proportionate voice in it, they are likely to move toward establishing financial arrangements among themselves that bypass it. That could eventually reshape the global economy. This is ultimately more than just a contest of national egos.

  •  They have four times as many people... (2+ / 0-)
    Recommended by:
    Sky Net, Dr Swig Mcjigger

    Congrats, China...you're now almost a quarter as productive as the West.

  •  Nominal GDP growth is easy. Unlike Americans, (1+ / 0-)
    Recommended by:
    katiec

    the Chinese don't think they can run out of their fiat currency. Creating and spending money is the easy part, its maintaining real growth that is the challenge.

    Want to raise nominal GDP, simply write everyone a $1000 check every month until we get back to 5% growth.

    "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

    by Auburn Parks on Wed Apr 30, 2014 at 01:34:30 PM PDT

    •  The Chinese can't even run out of (2+ / 0-)
      Recommended by:
      Richard Lyon, Auburn Parks

      our fiat currency.

      And you've got to admit: writing everyone a $1000 check is a better solution that the "stimulus package" we actually got.  

      Much as I despised Dubya Bush for just sending us chunks of the money we could've used for paying off the debt or investing in infrastructure, I have to admit that what he did was superior to just about anything that's happened since then.

      That's how low we've sunk; that's how rightward the Overton Window has shifted.

      Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

      by corvo on Wed Apr 30, 2014 at 01:41:20 PM PDT

      [ Parent ]

      •  and by (1+ / 0-)
        Recommended by:
        Richard Lyon

        "everything that's happened since then" I include Dubya's horrific and obscene bank bailout.  

        Just so y'alls don't misunderstand me.

        Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

        by corvo on Wed Apr 30, 2014 at 01:42:08 PM PDT

        [ Parent ]

      •  I agree with everything you said here. (1+ / 0-)
        Recommended by:
        Richard Lyon

        That anyone could think Obama is this liberal is just crazy. His economic policies are almost exactly the same as Reagan-Clinton-W policies.

        The one quibble I have is that $120 B per year of the stimulus was the FICA reduction, and since that is a very regressive tax, that serves just about the same purpose.

        For example, suspending FICA would result in a 7.5% take-home pay increase to workers. Which is pretty significant. The main negative about FICA is that unlike just mailing a check, independent contractors, stay-at-home moms, and the millions of people who don't pay FICA don't get any benefit from a FICA cut, whereas they would get the $1000 check.

        So I guess the net effect is that you, me, and (Gulp! I can't believe I'm writing this) Bush were right about mailing everyone checks.....Yikes! that was painful :)

        "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

        by Auburn Parks on Wed Apr 30, 2014 at 01:50:16 PM PDT

        [ Parent ]

        •  Dubya wasn't right about mailing the checks. (0+ / 0-)

          He was wrong.

          Just less wrong than everything that came after.

          Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

          by corvo on Wed Apr 30, 2014 at 01:53:05 PM PDT

          [ Parent ]

          •  Now I'm confused. Are you saying that mailing (0+ / 0-)

            everyone checks is a bad policy with 10% unemployment? I thought you said the opposite.

            "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

            by Auburn Parks on Wed Apr 30, 2014 at 02:02:15 PM PDT

            [ Parent ]

            •  There were better things (0+ / 0-)

              that could've been done with the money.  

              Infrastructure investment would've resulted in more employment . . . and . . . improved infrastructure!

              But that would've been SOCIALISM and thus anathema to the bipartisan consensus.  So we didn't get it.

              Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

              by corvo on Wed Apr 30, 2014 at 02:08:43 PM PDT

              [ Parent ]

              •  Sure but mailing everyone checks doesn't preclude (1+ / 0-)
                Recommended by:
                katiec

                us spending on infrastructure, as long as we are below full employment. I just don't view infrastructure spending as a good stimulus policy.

                My rule of thumb is, if its worth investing in during a recession, its always worth doing.

                I think we should choose a % of our total national output to dedicate to infrastructure, research, and education each year and stick with it. China spends like 7-10% of their GDP on infrastructure every year. We have such a head start that we can probably get away with 5% of GDP or $800 Billion next year in just infrastructure.

                If we need more demand after that, then mail everyone checks. Its just that instituting a rational, fraud minimized program for allocating 100's of billions of dollars a year in infrastructure spending in a couple of months when a recession hits is just not very practical.

                "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

                by Auburn Parks on Wed Apr 30, 2014 at 02:14:48 PM PDT

                [ Parent ]

                •  We'll have to agree to disagree. (0+ / 0-)

                  Myself, I like electricity grids that work, transportation systems that function, bridges that don't collapse.

                  But that's just me.

                  It's not like we'll see any more checks from Uncle Sam anyway.

                  Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

                  by corvo on Wed Apr 30, 2014 at 02:50:24 PM PDT

                  [ Parent ]

                  •  And can you please point out where in my (0+ / 0-)

                    comment explaining how I'd like to more than double our current investment in infrastructure do you get that I don't want a functioning electric and transportation system?

                    Are you saying that you would like to invest more than I proposed per year?

                    What are you saying?

                    "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

                    by Auburn Parks on Wed Apr 30, 2014 at 02:57:12 PM PDT

                    [ Parent ]

                    •  umm (0+ / 0-)
                      Are you saying that you would like to invest more than I proposed per year?
                      Yes, that's precisely what I'm saying.

                      As for your puerile accusations: buh bye.  I'm done with you.

                      Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

                      by corvo on Wed Apr 30, 2014 at 03:06:10 PM PDT

                      [ Parent ]

                      •  You are so funny: (0+ / 0-)

                        "We have such a head start that we can probably get away with 5% of GDP or $800 Billion next year in just infrastructure."

                        So you want to spend more than $800 Billion every year on infrastructure. I'm glad that you agree with me.

                        So then are you saying that anybody who want less than $800 Billion in infrastructure spending each year does not want functioning electrical and transportation systems?

                        This would be so much easier if you weren't so intellectually dishonest and you would just admit that you were wrong for implying that I don't want a functioning infrastructure.

                        But you probably won't because people cant admit their mistakes, its a serious character flaw in most humans.

                        Good day

                        "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

                        by Auburn Parks on Wed Apr 30, 2014 at 03:10:43 PM PDT

                        [ Parent ]

                  •  That is seriously so dishonest a response from you (0+ / 0-)

                    I can hardly believe it. You know who else just makes things up, misrepresents and flat out lies during discussions?

                    Right wing trolls.

                    Now, of course, I'm not saying you are a right wing troll only that your egregious intellectual dishonesty is reminiscent of the same types of things right wingers do when logic, reason, and the evidence do not support their arguments.

                    "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

                    by Auburn Parks on Wed Apr 30, 2014 at 03:00:16 PM PDT

                    [ Parent ]

      •  I see now where you are coming from now. (1+ / 0-)
        Recommended by:
        katiec

        How can you acknowledge that we have our very own fiat currency that only we can issue and then 2 sentences later say that we need to pay down the debt?

        Don't you see the cognitive dissonance there?

        Why should we be concerned about owing people a money that only we can produce? All US Dollars are a liability of the US Govt. some pay interest, others don't. "paying down" the number of T-bonds simply means that we are removing that amount of financial wealth from the private economy. Thats a far worse policy than giving everyone money in a demand constrained economy.

        "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

        by Auburn Parks on Wed Apr 30, 2014 at 02:09:40 PM PDT

        [ Parent ]

        •  Sooner or later, (0+ / 0-)

          if you don't honor your debts, other folks stop honoring your debt instruments.

          It's happening already.

          Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

          by corvo on Wed Apr 30, 2014 at 02:12:08 PM PDT

          [ Parent ]

          •  Who said anything about not honoring debts? (0+ / 0-)

            Every year, 10's of trillions of dollars worth of US Securities are mature and are "honored" in your words. Its just a matter of the Fed debiting securities accounts on its spreadsheet and crediting reserve accounts.

            Both reserves and securities are liabilities of the US Govt, meaning that the US Govt "owes you" that amount of tax credits or fees. Whether or not the liabilities pay interest is almost irrelevant.

            "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

            by Auburn Parks on Wed Apr 30, 2014 at 02:17:11 PM PDT

            [ Parent ]

            •  And they become worth less and less (0+ / 0-)

              the more of them we issue.  

              It's no secret that the Chinese can't stop keeping the renminbi from appreciating against the dollar, much as they've tried over the years.

              Now they're hoarding gold.

              Dogs from the street can have all the desirable qualities that one could want from pet dogs. Most adopted stray dogs are usually humble and exceptionally faithful to their owners as if they are grateful for this kindness. -- H.M. Bhumibol Adulyadej

              by corvo on Wed Apr 30, 2014 at 02:48:56 PM PDT

              [ Parent ]

              •  Whats your point? Yes, inflation means that any (1+ / 0-)
                Recommended by:
                katiec

                $1 buys less, but if you have more dollars, then you are no worse off.

                Do you really think we are worse off today than in 1990 just because the dollar index will always go up? Thats why real wages matter, if your wages grow faster than inflation, thats real growth. Unfortunately, we are making less money today in real terms than in 1989, which means that people don't have enough money.

                Which is why its necessary to mail everyone checks and give the america people a raise.

                And about the Yuan-Dollar inflation rate, whats wrong with that? It will just mean that our trade balance will adjust. Thats no big deal.

                "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

                by Auburn Parks on Wed Apr 30, 2014 at 02:54:52 PM PDT

                [ Parent ]

          •  From the Govt's Treasury Direct FAQ website: (1+ / 0-)
            Recommended by:
            katiec

            "Do I have a choice as to where my Treasury securities are kept?

            All Treasury securities are issued in what is called "book-entry" form - an entry in a central electronic ledger. You can hold your Treasury securities in one of three systems: TreasuryDirect, Legacy Treasury Direct (existing accounts only), or the Commercial Book-Entry System. TreasuryDirect and Legacy Treasury Direct are direct holding systems where you have a direct relationship with us. (NOTE: Legacy Treasury Direct is being phased out.)"

            There you have it, all Govt "debt" is nothing but an accounting notation on the Fed's balance sheet. All Fed inputs can be either

            Reserve
            or
            Securities

            Checking
            or
            Savings

            When you transfer your money from your Chase checking account into a Chase 6-month CD, nobody on earth iis worried about Chase being in debt, and what are we going to do about Chase's grandchildren.

            This is no different than the Central Bank.

            "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

            by Auburn Parks on Wed Apr 30, 2014 at 02:33:01 PM PDT

            [ Parent ]

          •  Oops, sorry forgot the link (0+ / 0-)

            "The Earth is my country and Science my religion" Christiaan Huygens. The gold standard ended on August 15, 1971, its time we start acting like it. If we can afford full employment killing Germans, we can afford full employment during peace-time.

            by Auburn Parks on Wed Apr 30, 2014 at 02:33:30 PM PDT

            [ Parent ]

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