China is Still Number Two

CAMBRIDGE – Headlines around the world this week trumpeted a watershed moment for the global economy. As the Financial Times put it, “China poised to pass US as world’s leading economic power this year.” This is a startling development – or it would be if the claim were not essentially wrong. In fact, the United States remains the world’s largest national economy by a substantial margin.

The story was based on the April 29 release of a report from the World Bank’s International Comparison Program. The ICP’s work is extremely valuable. I eagerly await and use their new estimates every six years or so, including to look at China.

The ICP data compare countries’ GDP using purchasing-power-parity (PPP) exchange rates, rather than market rates. This is the right thing to do when looking at real (inflation-adjusted) income per capita in order to measure people’s living standards. But it is the wrong thing to do when looking at national income in order to measure the country’s weight in the global economy.

The bottom line is that, by either criterion – per capita income (at PPP exchange rates) or aggregate GDP (at market rates) – the day when China surpasses the US remains in the future. This in no way detracts from the country’s impressive growth record, which, at about 10% per year for three decades, constitutes a historical miracle.