China Just Overtook The US As The World's Largest Economy

[MDMAlliance]

freedquaker said:

daredevil.shark said:

China Just Overtook The US As The World's Largest Economy

REUTERS/Shannon Stapleton Sorry, America. China just overtook the US to become the world's largest economy, according to the International Monetary Fund.

Chris Giles at the Financial Times flagged up the change. He also alerted us in April that it was all about to happen. 

Basically, the method used by the IMF adjusts for purchasing power parity, explained here.

The simple logic is that prices aren't the same in each country: A shirt will cost you less in Shanghai than in San Francisco, so it's not entirely reasonable to compare countries without taking this into account. Though a typical person in China earns a lot less than the typical person in the US, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have. The Economist's Big Mac Index is a great example of these disparities.

So the IMF measures both GDP in market-exchange terms and in terms of purchasing power. On the purchasing-power basis, China is overtaking the US right about now and becoming the world's biggest economy.

We've just gone past that crossover on the chart below, according to the IMF. By the end of 2014, China will make up 16.48% of the world's purchasing-power adjusted GDP (or $17.632 trillion), and the US will make up just 16.28% (or $17.416 trillion):

IMF, Google Public Data Explorer Adjusted for purchasing power, China's economy is now the world's largest. It's not all sour news for the US. It'll be some time yet until the lines cross over in raw terms, not adjusted for purchasing power. By that measure, China still sits more than $6.5 trillion lower than the US and isn't likely to overtake for quite some time:

IMF, Google Public Data Explorter But in terms of the raw market value of China's currency, it still has a long way to go.

 

 

Source: http://finance.yahoo.com/news/china-just-overtook-us-worlds-090801574.html

I have to object to this as economist!

GDP as a whole, should never be measured in PPP terms as it is simply meaningless. The entire economy of a country is only present in the world in nominal exchange rate parity. You don't exist in the global arena in YOUR prices. So, no, US is still the largest world economy, BY FAR.

However, GDP per capita should be measured in PPP terms as it is a proxy for income per capita for individuals who spend their money in the home country, with domestic prices. You shouldn't read too much into the PPP though, since the international imports will still be traded in international prices, not necessarily domestic. In essence, even if country A's GDP/cap PPP is equal to country B's, the country with higher NOMINAL GDP/cap (and higher prices) is still better off, with greater purchasing power in internationally traded goods!

So things are not as simple as they seem!

There's also the fact that China is cheating by artificially keeping their currency low.  That will eventually come back and bite them in their butts.