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China Set to Overtake U.S. as Biggest Economy in PPP Measure

By Bloomberg News
April 30, 2014 4:32 PM EDT 137 Comments
Workers make final inspections on vehicles on the production line at a plant operated by Dongfeng Peugeot-Citroen Automobile Ltd., in Wuhan, China.
Photographer: Tomohiro Ohsumi/Bloomberg
Workers make final inspections on vehicles on the production line at a plant operated by Dongfeng Peugeot-Citroen Automobile Ltd., in Wuhan, China.

China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year, using calculations that take purchasing power into account.

China’s economy was 87 percent of the size of the U.S. in 2011, based on so-called purchasing power parity, the International Comparison Program said in a statement yesterday in Washington. The program, which involves organizations including the World Bank and United Nations, had put the figure at 43 percent in 2005.

The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014, which would be years earlier than many economists had previously estimated, according to Arvind Subramanian of the Peterson Institute for International Economics.

“There’s a symbolic element to this, to China overtaking the U.S., and that seems to be happening,” said Subramanian, a senior fellow at the Washington-based Peterson Institute. The latest data “plays to the idea that China is very big and getting bigger. It’s not to be underestimated.”

In a book published in September 2011, Subramanian estimated China became the world’s largest economy in 2010. While this was too early, the International Monetary Fund’s projections in its World Economic Outlook show China will move to the top in 2019, which is too late, he said today.

U.S. Share

The U.S. share of global GDP was 17.1 percent in 2011, while China was 14.9 percent, according to the ICP figures based on purchasing power parity, which seeks to compare how far money goes in each country. PPP calculates gross domestic product using exchange rates that adjust for price differences of the same goods between nations.

Yet China was well behind the U.S. based on another comparison, which looks at GDP in U.S. dollars at market exchange rates. By that approach, the U.S. share of 22.1 percent was more than double that of China’s 10.4 percent, the ICP data show.

JPMorgan Chase & Co. prefers to use market exchange rates for its “hard-nosed business cycle analysis,” said David Hensley, the bank’s director of global economic coordination in New York. That approach “gives a better sense of the resources that a country has command over.”

While JPMorgan keeps an eye on PPP comparisons as a secondary measure, it’s a hypothetical calculation which assumes one price level across all countries, Hensley said.

Different World

“That’s not the world we live in,” said Hensley. In addition to problems in measuring PPP, it “inflates the relative size and importance and command over resources that countries like China, India, Brazil or Russia have. That can create mistakes in judgment if you’re not careful.”

Hensley estimates that based on market exchange rates, the U.S. will stay in the lead until about 2024, when China crosses over as the world’s biggest economy, he said.

Changes in methodology contributed to the speed of China’s rise, according to the ICP report. Using market rates, U.S. gross domestic product was $16.2 trillion in 2012, compared with China’s $8.2 trillion. India vaulted into third place, ahead of Japan, the latest ICP figures also show.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Joshua Fellman

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