China overtakes US as world's biggest economy (kind of)

China has become the world's biggest economy, overtaking the mighty USA, which has been the world's economic superpower for more than a century. But there's a catch:

Is this the end of the Pax Americana?

If you believe the International Monetary Fund it is. The long awaited day has arrived. The economy of the Middle Kingdom is now bigger than that of Uncle Sam. At least by Purchasing Power Parity.

Hang on a minute, what's Purchasing Power Parity?

Good question. Purchasing Power Parity looks at a country's gross domestic product (GDP) based  on the comparative spending power of the individuals within it combined. It's an attractive measure because it adjusts for the fact that while wages in supposedly less developed countries tend to be lower than in mature economies, the price of goods and services are often also considerably cheaper.

Is this something to do with the Big Mac Index?

That's not a bad way of looking it. A Big Mac, for example, will cost you a lot less in Beijing than it will in Boston. PPP adjusts for that fact. Of course, in calculating it you have to consider a lot more than just a Big Mac. To make it work you have to look at a vast range of goods and services. And that's where the problems start.

Why so?

Well there have been numerous controversies over the methodology used for calculating PPP. These have kept legions of pointy heads in well paid work for years. Putting it together is also a huge statistical undertaking that can only be done relatively infrequently. In the interim, economists have to rely on estimates.

Oh. So what does it all mean?

Put it this way, regardless of the debates about statistics even if China isn't ahead now (and it probably is), it will be soon. Although it will still take several years for it to outpace the US by conventional measures of GDP.


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