BEIJING – Is China poised to surpass the United States to become the world’s largest economy? The International Monetary Fund recently predicted that the size of China’s economy would overtake that of the US in terms of purchasing power parity (PPP) by 2016.
But a recent co-authored study by Robert Feenstra, an economist at the University of California, Davis, shows that global economic leadership would pass to China in 2014. And, even more radically, Arvind Subramanian of the Peterson Institute of International Economics argues that China actually surpassed the US in PPP terms in 2010.
Purchasing power parity measures a country’s income using a set of international prices applied to all economies. Prices in developing countries are usually lower than in the developed countries. Therefore, their income could be underestimated if calculated only according to the exchange rate. Income measured in PPP helps to avoid this problem.
But estimating PPP income raises its own set of problems. One consists in the fact that every country has a different consumption basket, with the greatest disparity between developing and developed countries. For example, foods usually account for 40% or more of household expenditure in a typical developing country, whereas the figure is less than 20% in most developed countries.