Will China become the world's largest economy?

[Barun Mitra]

China might NEVER become the biggest economy in the world

It is often assumed that given China’s remarkable growth rates over the past three decades – around 10% real GDP per year – China is on the way to soon becoming the largest economy in the world. In fact earlier this year it got a lot of media attention that when the World Bank argued that China already had overtaken the US as the largest in economy in the world. However, the argument was completely bogus as it was based on Purchasing Power Parity (PPP) rather than on actual exchange rates (To be fair we should blame the media rather than the World Bank for this interpretation of the data).

PPP based measures of GDP (per capita) might make sense if we want to measure how much an average citizen can buy for given an average income, however, it does not make sense when we want to measure the size of the economy. There we have to use measures based on actual exchange rates and if we do that then it turns out that the Chinese economy is still significantly smaller than the US economy. Hence, total Chinese GDP today is around 10 trillion USD, while US GDP is around bn 17-18 trillion USD. Said in another way the US economy is still nearly double the size of the Chinese economy.

And what I will argue in this post is that China might never overtake the US as the biggest economy in the world.

http://marketmonetarist.com/2014/08/27/china-might-never-become-the-biggest-economy-in-the-world/