The World’s Biggest Economy: - America or China? -

Thought for the day

The World’s Biggest Economy

America or China?

Last updated: 2 July 2024

There is some dispute over which of the two undisputed superpowers is the biggest.

The Economist (for example) clearly thinks America remains king of the jungle. Its issue dated May 13th 2023 subheads a paper called Peak China with the unequivocal "The meteoric rise of China's economy is ending". And notes later that "Even if China's economy does become the biggest in the world, its lead is likely to remain small".

It must be emphasised that nothing is certain in the murky world of economic data. World Economics has spent many years studying GDP measures and knows a significant proportion of GDP data is little better than random numbers, as one notable economist referred to some African data. The Economist may be right. However there are good reasons for believing that China's GDP is already significantly bigger, and is continuing to grow significantly faster than that of America. Here they are:

First, the view that the American economy is still bigger than China's rests mainly on using the unrefined dollar as the measure. But as all travellers know, a dollar in downtown Hanoi buys more than a dollar in NYC. In the same article we cite, The Economist itself points out that a basket of goods and services that costs $100 in America, costs only about $60 in China, yet measures US supremacy without considering the big price differentials.

An alternative measure of country wealth is based on Purchasing Power Parity (PPP), and is widely believed to be more reliable as a measure of relative GDP between countries than simple dollar values. In 2022, the IMF judged the Chinese economy in PPP terms to be 23% larger than America. At the same time, using PPP data the World Bank estimated the Chinese economy to be 18.8% larger than America. And even the CIA considered the differential in favour of China at 16%.

Chinese vs. United States GDP Growth 2003-2023
GDP PPP, Int$, Trillions (2003-2023)

* GDP in Purchasing Power Parity terms with added estimates for the size of the informal economy and adjustments for out-of-date GDP base year data.

But this is not the whole picture. World Economics has reviewed differences in the calculations used. A second factor is that the Base Year used in calculation of Chinese GDP is 2015, some 8 years out of date (compared with the equivalent American calculation using a more modern system that is right up to date). An out of date base year suggests undervaluation. Much has changed over the period. World Economics estimates revaluing the Chinese economy to take account of the out of date base year would add roughly 12% to the size of China's GDP.

Finally, there is a third factor also likely to make a significant difference (data suggests about 5%) to the measured size of economic activity: the difference in size of the largely unmeasured Informal economy (or Shadow economy) between the two countries. No prizes for guessing which country is likely to gain the most from the addition of its informal economy.

Making allowances for these three factors, World Economics estimates that the Chinese economy is approximately 33% larger than of the United States, as of today.

So much for relative size. What about relative GDP growth in the past, IMF data shows Growth in the Chinese economy over the past decade, the past 5 years, and the past 3 years, to have been consistently 2.5% - 3% higher in China than in the USA. On another measure, China's Share of Global GDP growth over the past decade has been no less than 30%, as opposed to America's 8.8%. On these measures, even a significant slowdown in China's growth will be unlikely to lead to parity with US GDP growth.

A final thought relates to the claim that China's economy is likely to slow down. The March/April 2023 issue of Foreign Affairs contained a very convincing paper (China's Hidden Tech Revolution, How Beijing Threatens US Dominance) by Dan Wang of Gavekal Dragonomics, emphasising the extraordinary progress made in China:

“The country's most significant technological achievement over the past two decades has been its development of a vast and highly experienced skilled workforce, which can be adapted as needed for the most tech-intensive industries".

Anyone reading this detailed look at China's strategy and capabilities is likely to be unconvinced the great motor of global economic growth of the last four decades is likely to stop growing faster than America, any time soon.

It is quite possible, on relatively modest assumptions, that China's economy will be approximately 45% bigger than that of America by 2030. There are after all, as Elon Musk remarked, "a lot of smart, hardworking people [in China]". And in all probability over four times more of them than in America.