The United States has had the biggest economy in the world since it stole the title from Britain in 1872. Recently, economists have estimated that China will unseat the US around 2020 as the country’s consumers grow and continue to spend. Now, based on its purchasing power parity, China has its first economic edge over the United States.
The PPP “Threat”
The purchasing power parity (PPP) measures the purchasing power of a worker’s currency and the value of goods they can buy, then compares that value to the currency in other countries. A recent report from the International Monetary Fund (IMF) found that Chinese workers now have a higher purchasing power parity than US workers, meaning, essentially, that their currency stretches further than the American dollar. Of course, it’s caused some widespread concern among Americans that the Chinese economy will outgrow the US’s sooner than expected…but that’s not exactly the case. While a Chinese worker may have higher purchasing power, it needs to be taken into account that goods are also much cheaper in China, and that money goes further in the developing world than in the industrialized world. China can’t buy missiles and iPhones and German cars in PPP currency; they have to pay at prevailing exchange rates. With this information, the fact that China has a higher PPP over the United States seems less threatening.
The PPP does not measure the strength of an economy. If we were to base estimations on the PPP, then it would be easy to see China taking over the US for the World’s biggest economy soon. Yet when China overtook Japan as the second biggest economy in 2010, it had reached Japan’s PPP milestone a decade before. China is still a country high in joblessness and does not have what it takes to become an economic powerhouse: a business model that invents rather than produces. China needs its own home-grown companies, like the US has Apple, Google, Facebook, General Mills, JP Morgan Chase, etc. Until then, it won’t make any huge jumps as an economy.
The Next Decade
The more common measure of an economy is the country’s Growth Domestic Product because it rations the total dollar value of a country’s goods and services produced over a year. The GDP is the better measurement tool because the PPP is prone to a margin of error and does not always account for a nation’s population, fluctuating exchange rates, or world resources. In terms of Growth Domestic Product, the United States still has a strong lead over China.
In 2013 the US had a GDP of $16.8 trillion to China’s $9.24 trillion. China is a country of 1.3 billion people so it’s not surprising to see it creep up on the United States, whose population is 25% of that. But per capita, China is still a poorer country. China’s economy will need to nearly double to become number one, and it likely won’t do that for at least another decade. Purchasing power parity or not, while China’s economy is growing fast it is not going to outgrow the American economy anytime soon.