By golly, I was right! China’s the world’s largest economy

“BUT you were right,” goes the subject of an email message sent to me by a consistent follower of this column. He was referring to the article “Thanks to me China has become the world’s largest economy,” which was published the other day. I wrote the article by way of correcting what I believed was a misquote of Chinese President Xi Jinping in an earlier article, “The 21st-century biblical paraphrase: no one goes to world prosperity and peace but by China,” in which he was quoted as saying, “… China has maintained its position as the world’s largest economy” when, as he spoke it in his speech before the 19th National Congress of the Communist Party of China, the last phrase should read: “world’s second largest economy.” But a very well read guy, the reader sent a link which he describes thus: “Here’s an item that confirms China is the largest economy.”

So I spoke too soon when I apologized in the subsequent article for what I thought was my mistake; the reader says it is not. The link, an article on the website Bloomberg View, comes in handy for my need for an informed elaboration on China’s economic standing in the world. It should serve as a preview to how and when China will achieve its vision of a world community of common destiny. It is quoted as follows:

**** tary, and economic. So an easier question to ask is: What’s the world’s largest economy? That’s almost certainly China.

Many might protest when hearing this. After all, the US still produces the most when measured at market exchange rates:

( A comparative graph of the GDP of leading economies at market exchange rates 2016, with the World Bank as source, is presented, showing the US leading by $18.6 trillion, followed far behind by China at $ 11.2 trillion, then Japan at $4.9 trillion, Germany at $3.5 trillion, and the UK at $2.6 trillion.)

Looks might be deceiving

This comparison is misleading, however, because things cost different amounts in different countries. Gross domestic product is supposed to measure the amount of real stuff— cars, phones, financial services, back massages, etc.—that an economy produces in a given period. If the same phone costs $400 in the US but only $ 200 in China, China’s GDP is getting undercounted by 50 percent when measured at market exchange rates. In general, less developed countries have lower prices, which means their GDP gets systematically undercounted.

Economists try to correct for this with an adjustment called purchasing power parity (PPP), which controls for relative prices. It’s not perfect, since it has to account for things like product quality, which can be hard to measure. But it probably gives a more accurate picture of how much a country really produces. And here, China has already surpassed the US:

(Another comparative graph of GDP at PPP 2016, showing China leading by $21.4 trillion, with the US at $18.6 trillion, India at $8.7 trillion, Japan at $ 5.3 trillion, Germany at $4 trillion.)

A better way to size things up

If you don’t trust the murky PPP adjustments, a simple alternative is just to look at the price of a Big Mac. The same burger costs 1.8 times more in the US than in China. Adjusting the marketexchange- rate GDP numbers by that ratio would put China even farther ahead.

In some dimensions, China’s lead is even larger. The country’s manufacturing output overtook that of the US’ almost a decade ago. Its exports are more than a third larger as well.

American commentators may be slow to recognize China’s economic supremacy, but the rest of the world are starting to wake up to the fact.

Appearances matter Survey of perception of economic power in developed nations

Source: Pew Research Center

This doesn’t mean China’s population is the world’s richest— far from it. The countries with the highest income per person— in following order—are Qatar, Luxembourg, Singapore, Brunei, and the UAE. But few would argue that Qatar or Luxembourg is the world’s leading economy—while per-capita numbers are important for the wellbeing of a nation’s people, they don’t translate into comprehensive national power unless a country also has a large population.

China’s modest per- person income simply means that the country has plenty of room to grow. Whereas developed countries can only get richer by inventing new things or making poor countries can cheaply copy foreign technology or imitate foreign organizational practices. That doesn’t always happen, of course— many poor countries - functional institutions, lack of human capital, or other barriers to development.

But there’s good reason to think that China will overcome at least some of these obstacles. Economists Randall Morck and Bernard Yeung have a new paper comparing the histories of Japan and South Korea—which both climbed out of poverty to achieve rich-country status—with the recent rise of China. They broadly speaking, developing along the same path, followed by its successful neighbors.

In other words, not only is China already the world’s largest economy, the gap between it and the US can be expected to grow even wider. This continues to be borne out in the growth statistics—though China has slowed in recent years, its economy continues to expand at a rate of more than 6 percent, while the US is set at just over 2 percent. If that disparity persists, China’s economy will be double that of the US’ in less than two decades.

“So economically, China has surpassed the US, and is on track to zoom far ahead in the near future. But what about military power?”

**** I stop quoting from the Noah Smith article. I’d rather not touch this issue. As Xi bared it in his speech, China is succeeding in its vision of a world community of shared future. Why spoil it with military questions?