With much faster growth rates between 2011 and 2014, China is now being forecast to eclipse the United States as the world’s largest economy sometime this year. The U.S. has been the world’s largest economy since the 1870s when it overtook Great Britain.
Before the current revisions were released this week, it was widely expected China would not overtake the United States until the end of this decade. The new data also catapulted India to the third largest economy, surpassing Japan.
In the meantime, economic freedom in the U.S.—what should be the real driver of our economy—is languishing. Similar can be said of America’s allies in Japan.
After extensive research on the price of good and services across 199 countries, the World Bank sponsored International Comparison Program (ICP) concluded that prices levels in developing countries were significantly lower than previously thought. This matters because there are basically two ways to measure the size of an economy. One is through current exchange rates, which do not take into account the differences in the cost of living between countries. At current exchange rates, the developed world, despite protracted slow growth, still accounts for two-thirds of global GDP.
The second method, Purchasing Power Parity (PPP), attempts to take into account the differences in the cost of living between countries and adjust Gross Domestic Product (GDP)—or the market value of output—accordingly. For example, if two villas of comparable quality were built—one outside of Shanghai and one outside of New York City—the market value, and in turn, contribution to GDP would be much lower in China unless an attempt was made to adjust for the price differences.
During the last revision of the survey in 2005, the ICP thought that China’s economy only accounted for about 43 percent of America’s total. But a combination of the recent revisions and much faster growth in China placed China’s GDP at 87 percent of the U.S. in 2011.