Did China just overtake the US as world's largest economy? Well, yes and no

Figures released by the International Monetary Fund show that China has toppled the US as the world's largest economy, but that is only because the numbers are based on purchasing power parity.  -- PHOTO: AFP
Figures released by the International Monetary Fund show that China has toppled the US as the world's largest economy, but that is only because the numbers are based on purchasing power parity.  -- PHOTO: AFP

Did China just overtake the United States as the world’s largest economy? Well, yes and no.

China has toppled the US as the world's biggest economy, according to figures released this week by the International Monetary Fund (IMF).

In its latest World Economic Outlook, China's gross domestic product (GDP), the sum of all the goods and services a country's produces, is now worth US$17.6 trillion (S$22.3 trillion) compared with US$17.4 trillion for the US.

But hold on a minute. Those numbers are based on something called "purchasing power parity", or PPP, which makes adjustments for the fact that goods are cheaper in countries such as China relative to the US.

As Business Insider explains: "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."

Without adjusting for the significant cost of living differences between the two countries and based on the raw value of their currencies, the US economy still leads China's by US$6.4 trillion.

Now some commentators are saying the toppling of America after nearly 150 years by China - even on the PPP measure - is a "watershed" moment for the global economy and nothing short of remarkable.

Consider how in 1980, China's economic output - based on PPP - was just a tenth of that of the US. By 2020, the IMF says China's economy will be 20 per cent bigger. (Consider also in passing how just days ago one of America's most iconic hotels - the Waldorf Astoria - was bought by Chinese investors.)

But while not denying China's achievements, financial news agency Bloomberg pooh-poohed "another false alarm in the China-overtaking-the-US saga".

"The US remains the biggest by the more common, more widely accepted and in our view, more useful measure," Mr David Hensley, JPMorgan Chase & Co.'s director of global economic coordination in New York, was quoted by Bloomberg as saying.

The PPP, said Mr Hensley, "it's not quite the real thing".

By looking at a PPP comparison, especially for developing nations, "you really exaggerate the importance of these economies," because it misses the command that each has over the world's resources and its influence over global activity, he said.

ann@sph.com.sg