NEW YORK – Has the Chinese economy really overtaken the U.S. economy as the world’s biggest?
Economists say it all depends on the metric used to measure the two economies.
Jeffrey Frankel, a professor at the Kennedy School of Government at Harvard, who served as a member of President Bill Clinton’s Council of Economic Advisors, has cautioned that measured in terms of absolute market size, the U.S. economy is valued at more than $20 trillion by the International Monetary Fund, which is still some $6.5 trillion larger than China’s.
“In fact, the United States remains the world’s largest national economy by a substantial margin,” Frankel writes. “The day when China surpasses the U.S. remains in the future.”
The Financial Times in London sounded the alarm this week based on newly released data from the World Bank’s International Comparison Program. It values economies not on absolute market value but on a measure called “Purchasing Power Parity,” or PPP, which determines “the rate at which the currency of one country would have to be converted into that of another currency to buy the same amount of goods and services in each country.”
In simple terms, the PPP attempts to adjust for the fact the Chinese government keeps the price of the Chinese Yuan artificially low against other world currencies, enabling the Chinese to buy more cheaply a hamburger, for instance, paid for in China, than the same hamburger bought in New York with U.S. dollars.
The ultimate measure of global PPP is published by the Economist in the U.K.. Known as the “Big Mac Index,” it is based on calculating the price of a Big Mac hamburger in various countries. In July, the average price of a Big Mac in the U.S. was $4.80, compared to $2.73 in China at market exchange rates, meaning the “raw” Big Mac Index concludes the Chinese Yuan was undervalued by 43 percent at that time.
Based on PPP calculations, the World Bank reported China’s economy was 87 percent the size of the United States economy in 2011, or 15 percent bigger than the previous estimate, positioned to pass the United Sates in purchasing power this year, even though China will still be only about 60 percent of the U.S. economy in terms of market exchange results.
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The basic problem is that comparing the economies of China and the U.S. is truly like comparing apples and oranges.
China’s growth in recent years has been extraordinary, with the International Monetary Fund projecting a rate of 7.5 percent in 2014, nearly triple the 2.8 percent outlook for the United States.
But China, with a population of 1.3 billion people, more than four times the population of the United States, barely ranks in the top 100 nations for income per person. Chinese consumers are estimated to have only about one-tenth as much money to spend as Americans, on a par with the Philippines, Bolivia and Iraq, according to economist Brian Jackson of IHS Global Insight.
Another metric used to measure the relative size and strength of the U.S. and Chinese economies involves understanding how deeply the U.S. has become indebted to China to continue the financing of the unprecedented amount of federal debt accumulated during the six years President Obama has been in office.
U.S. debt that has just surpassed $18 trillion, registering an 80 percent increase in Obama’s first six years in office, with the prospect Obama will have doubled the national debt in his two terms as president.
As of November, China, the leading foreign holder of U.S. debt, held an all-time record of $1.317 trillion of U.S. Treasuries, exceeding China’s previous high of $1.315 trillion in July 2011. Meanwhile, China’s holdings of foreign-exchange reserves surged to a record $3.82 trillion at the end of 2013, as noted by Fox Business.
The U.S. Treasury decision in November to issue more than $1 trillion in new debt to pay off old debt by retiring Treasury securities that were maturing and to fund new deficit spending by the Obama administration has been characterized as a “Ponzi scheme” by knowledgeable economic observers.
This debt analysis would indicate that the U.S. economy remains the largest in market value in part because of China’s willingness to subsidize U.S. growth by funding a large and increasing amount of debt.
In an independently calculated estimate, the Economist has revised the projection originally made in 2010, concluding now that the Chinese economy will not emerge as the world largest economy until 2021, instead of 2019, as originally projected.
“The biggest surprise has been the halt of Yuan appreciation this year – a policy dictated by the government, not the market – and the sharp drop in inflation as producer prices have fallen,” the Economist reported Aug. 22. “A yawning trade surplus still points to a stronger Yuan, so we maintain our forecast for sustained appreciation, though expect the upward march to come in fits and starts.”
