REUTERS/Shannon StapletonSorry, 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 back in April this year 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 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 cross-over 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 $US17.632 trillion), and the US will make up just 16.28% (or $US17.416 trillion):
IMF, Google Public Data ExplorerAdjusted for purchasing power, the IMF thinks China’s economy is now the world’s largest.It’s not all sore news for the US. It will 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 $US6.5 trillion lower than the US and isn’t likely to overtake for quite some time:
IMF, Google Public Data ExplorterBut in terms of the raw market value of China’s currency, it still has a long way to go.Follow Business Insider Australia on Facebook, Twitter, and LinkedIn
Note the Declaration of Independence declares all men are created equal, not economies. If the world's longest uninterrupted constitutional government is not a feat in itself, I still would not trade freedom of speech or individual liberty for all the tea in China. Let us know when they have more guns and then we might just re-open a few of our old factories. We needed another "Sputnik" impetus--Thanks in return.
All GDP measures indicate is that China consumes and produces more resources. GDP does nothing to say how much discretionary spend they have available to invest in innovation / technology, arms, space race or whatever else one chooses to deploy excess funds as a result of the resource consumption that the GDP indicates. GDP does not measure profit.
Trying to measure a Nation's fiscal strength via GDP is like trying to say "I have more spending power than you because my 10 child family spent $300,000 and earned $320,000 last year and your single child family only spent $150,000 and earned $250,000". Who has more real discretionary spending power?
China has population numbers and industrial power in certain verticals and has made gains appropriate with these scalability strengths, but they won't 'catch' the US in terms of real discretionary spend power and tax base size without a complete restructuring of their economic (and government) model.
It is the productivity and efficiency measures that dictate how much excess funds are left over for Military, technology innovation and the space race etc. Productivity and efficiency are a function of the level of Industry University Government R&D collaboration and spend, the overall effectiveness of that network, in addition to the base education level (e.g. number of PHD's from top 500 Global Universities). The US is light years ahead in terms of the amount of resources it has to spend on Military, technology innovation and the space race etc, irrespective of how much China "consumes" and "produces" via the crude GDP measure.
The US has more knowledge, capability and surplus funds due to the level of Industry University Government R&D collaboration and overall effectiveness of that network, in addition to the base education level. Think - high tax base and profitable companies allows high spend on Industry University Government R&D collaboration and overall effectiveness of that network in addition to spend on the base education level. This in turn causes high innovation, which causes more efficiency and productivity and surplus funds, which means more spend on University Government R&D collaboration and overall effectiveness of that network in addition to further increases in the base education level.
All that has happened is that China now consumes more than the US. Not surprising given their standard of living has steadily risen and their is an enormous population. However, they have a long way to go to match the US on surplus funds (profit per person) and overall tax base, which is what really dictates a nation's "power". I really cannot see China getting anywhere near the US in terms of real fiscal strength without major structural change and an opening up of their country. This means less corruption that a one party system indoctrinates, and a wider acceptance of a more democratic and transparent government and educational process.
"... real fiscal strength ..."
Does it make any difference that the U.S. is up to its eyeballs in 18 trillion dollars of debt?