{"id":34419,"date":"2020-10-19T18:42:53","date_gmt":"2020-10-19T13:12:53","guid":{"rendered":"https:\/\/kashmir.today\/?p=34419"},"modified":"2020-10-19T18:42:53","modified_gmt":"2020-10-19T13:12:53","slug":"china-overtakes-us-and-is-now-the-worlds-largest-economy-imf","status":"publish","type":"post","link":"https:\/\/kashmir.watch\/?p=34419","title":{"rendered":"China overtakes US and Is Now the World\u2019s Largest Economy: IMF"},"content":{"rendered":"\n
China has now displaced the U.S. to become the largest economy in the world. Measured by the more refined yardstick that both the IMF and CIA now judge to be the single best metric for comparing national economies, the IMF Report shows that China\u2019s economy is one-sixth larger than America\u2019s ($24.2 trillion versus the U.S.\u2019s $20.8 trillion). Why can’t we admit reality? What does this mean?<\/em><\/strong><\/h5>\n\n\n\n

By<\/strong>: Graham Allison<\/a><\/p>\n\n\n\n\n\n

This week, the IMF presented its 2020 World Economic Outlook providing an overview of the global economy and the challenges ahead. The most inconvenient fact in the Report is one Americans don\u2019t want to hear\u2014and even when they read it, refuse to accept: China has now displaced the U.S. to become the largest economy in the world. Measured by the more refined yardstick that both the IMF and CIA now judge to be the single best metric for comparing national economies, the IMF Report shows that China\u2019s economy is one-sixth larger than America\u2019s ($24.2 trillion versus the U.S.\u2019s $20.8 trillion).<\/p>\n\n\n\n\n\n

Despite this unambiguous statement from the two most authoritative sources, most of the mainstream press\u2014with the exception of The Economist\u2014continue reporting that the U.S. economy is No. 1. So, what\u2019s going on?<\/p>\n\n\n\n\n\n

Obviously, measuring the size of a nation\u2019s economy is more complicated than it might appear. In addition to collecting data, it requires selecting a proper yardstick. Traditionally, economists have used a metric called MER (market exchange rates) to calculate GDP. The U.S. economy is taken as the baseline\u2014reflecting the fact that when this method was developed in the years after World War II, the U.S. accounted for almost half of global GDP. For other nations\u2019 economies, this method adds up all goods and services produced by their economy in their own currency and then converts that total into U.S. dollars at the current \u201cmarket exchange rate.\u201d For 2020, the value of all goods and services produced in China is projected to be 102 trillion yuan. Converted to U.S. dollars at a market rate of 7 yuan to 1 dollar, China will have an MER GDP of $14.6 trillion versus the U.S. GDP of $20.8 trillion.<\/p>\n\n\n\n\n\n

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Photo Credit: REUTERS\/Kim Kyung-Hoon<\/figcaption><\/figure><\/div>\n\n\n\n\n\n

But this comparison assumes that 7 yuan buy the same amount of goods in China as $1 does in the U.S. And obviously, that\u2019s not the case. To make this point easier to understand, The Economist<\/em> Magazine<\/em> created the \u201cBig Mac Index<\/em>\u201d from which the graph at the top of this piece is derived. As this index shows, for 21 yuan, a Chinese consumer can buy an entire Big Mac in Beijing. If he converted those yuan at the current exchange rate, he would have $3, which will only buy half a Big Mac in the U.S. In other words, when buying most products from burgers and smartphones, to missiles and naval bases, the Chinese get almost twice as much bang for each buck.<\/p>\n\n\n\n\n\n

Recognizing this reality, over the past decade, the CIA and the IMF have developed a more appropriate yardstick for comparing national economies, which is called PPP (purchasing power parity). As the IMF Report explains, PPP \u201celiminates differences in price levels between economies\u201d and thus compares national economies in terms of how much each nation can buy with its own currency at the prices items sell for there. While MER answers how much Chinese would get at American prices, PPP answers how much Chinese do get at Chinese prices.<\/p>\n\n\n\n\n\n

If the Chinese converted their yuan to dollars, bought Big Macs in the U.S., and took them home on the plane to China to consume them, comparing the Chinese and U.S. economies using the MER yardstick would be appropriate. But instead, they buy them at one of the 3300 McDonald\u2019s locations in their home country where they cost half what Americans pay.<\/p>\n\n\n\n\n\n

Explaining its decision to switch from MER to PPP in its annual assessment of national economies\u2014which is available online in the CIA Factbook\u2014the CIA noted that \u201cGDP at the official exchange rate [MER GDP] substantially understates the actual level of China’s output vis-a-vis the rest of the world.\u201d Thus, in its view, PPP \u201cprovides the best available starting point for comparisons of economic strength and wellbeing between economies.\u201d The IMF adds further that \u201cmarket rates are more volatile and using them can produce quite large swings in aggregate measures of growth even when growth rates in individual countries are stable.\u201d<\/p>\n\n\n\n\n\n

In sum, while the yardstick most Americans are accustomed to still shows that the Chinese economy is one-third smaller than the U.S., when one recognizes the fact that $1 buys nearly twice as much in China than in the U.S., the Chinese economy today is one-sixth larger than the U.S. economy.<\/p>\n\n\n\n\n\n

So what? If this were simply a contest for bragging rights, picking a measuring rod that allows Americans to feel better about ourselves has a certain logic. But in the real world, a nation\u2019s GDP is the substructure of its global power. Over the past generation, as China has created the largest economy in the world, it has displaced the U.S. as the largest trading partner of nearly every major nation (just last year adding Germany to that list). It has become the manufacturing workshop of the world, including for face masks and other protective equipment as we are now seeing in the coronavirus crisis. Thanks to double-digit growth in its defense budget, its military forces have steadily shifted the seesaw of power in potential regional conflicts, in particular over Taiwan. And this year, China will surpass the U.S. in R&D spending, leading the U.S. to a \u201ctipping point in R&D\u201d and future competitiveness.<\/p>\n\n\n\n\n\n

For the U.S. to meet the China challenge, Americans must wake up to the ugly fact: China has already passed us in the race to be the No. 1 economy in the world. Moreover, in 2020, China will be the only major economy that records positive growth: the only economy that will be bigger at the end of the year than it was when the year began. The consequences for American security are not difficult to predict. Diverging economic growth will embolden an ever more assertive geopolitical player on the world stage.<\/p>\n\n\n\n\n\n

\n\n\n\n

Graham T. Allison<\/a> is the Douglas Dillon Professor of Government at the Harvard Kennedy School. He is the former director of Harvard\u2019s Belfer Center and the author of Destined for War: Can America and China Escape Thucydides\u2019s Trap?<\/a><\/em><\/p>\n\n\n\n

\n\n\n\n

With inputs from Agencies<\/a><\/em><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"

China has now displaced the U.S. to become the largest economy in the world. Measured by the more refined yardstick that both the IMF and CIA now judge to be the single best metric for comparing national economies, the IMF Report shows that China\u2019s economy is one-sixth larger than America\u2019s ($24.2 trillion versus the U.S.\u2019s […]<\/p>\n","protected":false},"author":1,"featured_media":25491,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[23],"tags":[],"class_list":["post-34419","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-world-news"],"_links":{"self":[{"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/wp\/v2\/posts\/34419","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/kashmir.watch\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=34419"}],"version-history":[{"count":0,"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/wp\/v2\/posts\/34419\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/kashmir.watch\/index.php?rest_route=\/"}],"wp:attachment":[{"href":"https:\/\/kashmir.watch\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=34419"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/kashmir.watch\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=34419"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/kashmir.watch\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=34419"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}