China to become world’s largest economy by purchasing power

A century of US dominance could come to an end as China becomes the world’s largest economy.

China is set to become the world’s biggest economy this year, according to a new report, ending over a hundred years of US supremacy on the global stage. The figures from the UN International Comparison Programme (ICP), which is hosted by the World Bank, calculates the size of an economy in terms of purchasing power parity (PPP).

While most calculations use market rates that do not account for exchange rate fluctuations, PPP instead looks at exactly how much a dollar can buy in each country to get a real sense of the spending power within an economy.

Market rates still suggest that the US is streaks ahead of China, with a gross domestic product of $16.2 trillion compared to the Asian nation’s $8.2 trillion. But PPP calculations show that, in 2011, China’s economy was 87 per cent of the size of the US – and since it is growing much faster than the US, the report says that China is poised to overtake it as early as this year.

China was not the only country to come out of the report looking stronger. It also found that India has leapfrogged Japan to take third place, with its economy almost doubling in size between 2005 and 2011. Nine years ago India’s economy was 19 per cent of the size of the US, compared to 37 per cent in 2011.

PPP calculations are difficult to verify. In fact, the calculations are so complicated that the ICP admits it is tough to determine how big the margin for error is. This means that there will be debate over how useful or even how accurate the figures are for some time. But as Linda Yueh points out in her BBC News blog, at least the data is an attempt to measure the spending power that comes from the income earned by citizens.

“What ultimately matters more than absolute size is the income earned by the people within a country,” she writes. “And it will be many more years before per capita GDP in China will overtake that of the US under any of these measures.”

Whether the figures are an accurate reflection of China’s economy, it is safe to say that the world has a new economic superpower. China is no longer just an emerging market. It has finally arrived.

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