There was a prolonged popping of champagne corks recently when the official statistics showed that China had surpassed Japan as the second biggest economy in the world. The celebrations were bogus because almost everyone knew that China's graduation really occurred last year, and the Japanese figures confirmed it some weeks before Beijing did.
The next round of speculation is when will China take over from the US as the world's top economic dog: could it be as early as 2020 or as late as 2030? But now an eminent US-based economist has concluded that in real terms China's economy is already bigger than America's.
Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, claims that in terms of purchasing power parity properly adjusted China has surpassed the US. He estimates China's gross domestic product (GDP) at US$14.8 trillion, slightly higher than the US with US$14.6 trillion. At market exchange rates, China reached US$5.88 trillion last year, according to China's own figures, announced in mid-February. (The US is US$14.6 trillion at market rates, of course.)
The limitations of market exchange rates to assess economic strength across international borders have long been recognised. You only have to look at the controversy over whether the yuan is manipulated, messaged or otherwise undervalued to appreciate this. The US Central Intelligence Agency Factbook says: 'Because China's exchange rate is determined by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output.'
The price of a quality home is not the same in the US, China and India, although in cities like Shanghai and Mumbai a home costs more than most places in developed countries. Prices of goods and services generally are typically far cheaper in developing countries where labour and other costs are less. This is especially so for the wide range of things that are not traded across borders.
Purchasing power parity (PPP) calculations are an alternative way of measuring and comparing economic reality across borders, using output according to volume rather than price. The CIA Factbook prefers PPP, as do other international organisations such as the International Monetary Fund and the Organisation for Economic Co-operation and Development. The CIA in its update of mid-February gives China's GDP as US$9.872 trillion. The IMF in October 2010 estimated China's GDP at PPP rates at US$10.084 trillion.
Subramanian takes issue with the IMF figures. He criticises a major 2005 revision based on a project by the International Comparison of Prices (ICP). As a result of this, GDP figures for both China and India were revised downwards by 40 per cent. The 2005 revisions have formed the basis for subsequent IMF estimates of purchasing power parity figures.
