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Wednesday, April 30, 2014 - 10:30am

China Could (By One Measure) Pass U.S. As No. 1 Economy This Year

Updated: 7 months ago.
China's economy is poised to become the world's largest but when?

China is poised to surpass the United States this year as the world's biggest economy, says an estimate released Wednesday by the World Bank's International Comparison Program.

The U.S. has held the top position since 1872, according to the Financial Times, when it took the spot from Britain. Economists had previously estimated that China would overtake the U.S. sometime in the 2020 or later.

Here's more from The Associated Press:

"The estimate by the World Bank's International Comparison Program says that based on 2011 prices, the purchasing power of China's currency, the yuan, was much stronger than was reflected by exchange rates.

"By that measure, China's economy was 87 percent the size of the United States' in 2011, or 15 percent bigger than the previous estimate, according to a calculation by RBS economist Louis Kuijs. Faster-growing China would pass the United States in purchasing power terms this year, though it still would be about 60 percent the size of the U.S. economy at market exchange rates."

So does this mean that China will henceforth be referred to as the world's largest economy? Not so fast.

The sticking point, as it is with many economic issues, lies in methodology. The ICP study used a measure known as purchasing power parity. That's an estimate of the cost of living in a particular country. As The Wall Street Journal reports:

"PPP is useful as a way to get at hidden advantages developing nations have. For instance, it costs the Chinese government much less to pay its soldiers than it does the U.S. government to pay GIs. Tourists from rich countries intuitively reflect on PPP when they visit poor ones and buy dinner, thinking, 'Geez, my dollar goes farther here.'"

But, the Journal adds: "[T]he 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."

Indeed. When comparing the size of gross domestic product, the U.S. economy ($16 trillion, according to 2012 World Bank estimates) is twice the size of China's. And when you look at numbers on a per capita basis, China comes in at No. 99, while the U.S. is No. 12. (Qatar is No. 1.)

China itself has rejected the World Bank finding, "expressing reservations" about the methodology. The AP reports that:

"China's government has been reluctant to acknowledge previous milestones showing its economic rise when it passed Germany as the biggest exporter, Japan as the No. 2 economy and the United States as the biggest trader.

"Its leaders have emphasized China's status as a middle-income country in resisting pressure to adopt binding limits on greenhouse gas emissions, for which their country is the biggest source."

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