China becomes the largest economy in the world

The IMF report measured by the “most accurate” measure that both the International Monetary Fund and the CIA now consider the best single measure for comparing national economies, and the IMF report shows that China’s economy is one-sixth larger than the US economy ($ 24.2 trillion versus $ 20.8 trillion).

Despite this clear statement from two reliable sources, most of the mainstream American press – with the exception of The Economist – continues to report that the US economy is number 1 in the year, so what happens?

It is clear that measuring the size of a country’s economy is more complex than it might seem. 

In addition to collecting data, it requires identifying an appropriate scale. 

Traditionally, economists have used a measure called MER (market exchange rates) to calculate GDP.

The US economy is the foundation, reflecting the fact that when this method was developed in the years after World War II, the United States accounted for nearly half of global GDP. 

For the economies of other countries, this method combines all the goods and services produced by their economy in their own currency, and then converts that total to the US dollar at the current “market exchange rate”.

In 2020, the value of all goods and services produced in China is expected to reach 102 trillion yuan. 

Converted into US dollars at a market rate of 7 yuan per dollar, China’s GDP will be $ 14.6 trillion against the United States’ GDP of $ 20.8 trillion.

But let’s be careful, this comparison assumes that 7 yuan buys the same amount of goods in China as one dollar in the United States and this is clearly not the case. 

To make this point easier to understand, the Economist magazine created the Big Mac Index from which the following chart is derived.

As this indicator shows, for a price of 21 yuan, a Chinese consumer can buy a complete “Big Mac” meal in Beijing. 

If he converted that yuan at the current exchange rate, he would get $ 3, which would only buy half of the Big Mac in the United States. 

In other words, when buying most products from burgers and smartphones, to missiles and naval bases, the Chinese are getting nearly twice the value per dollar.

Aware of this fact, over the past decade, the CIA and the International Monetary Fund have developed a more appropriate measure for comparing national economies, which is called PPP (purchasing power parity). 

As the IMF report explains, purchasing power parity “eliminates differences in price levels between economies,” and thus compares national economies in terms of how much each country can buy in its own currency for the prices at which it is sold. 

Whereas the MER index answers how much the Chinese will receive in US prices, the PPP answers how much the Chinese will receive in Chinese prices.

And if the Chinese convert their yuan into dollars, buy a Big Mac in the United States, and take it on the plane to their homeland of China for consumption, then a comparison of the Chinese and US economies using the MER scale would be appropriate. 

Instead, they buy it at one of 3,300 McDonald’s outlets in their home country, where it costs half what Americans pay.

The CIA’s decision to switch from market exchange rate to purchasing power parity makes clear in its annual assessment of national economies – available online in the CIA Fact book – that “GDP at the official exchange rate [MER GDP] greatly reduces the actual level of Chinese production versus the rest of the world”. 

Thus, in his view, purchasing power parity “provides the best available starting point for comparisons of economic strength and welfare between economies”. 

The International Monetary Fund also adds that “market rates are more volatile and their use can lead to very large fluctuations in aggregate growth measures even when growth rates in individual countries are stable”.

In short, the benchmark most Americans used to show was that the Chinese economy is one-third smaller than the United States, but when one realizes the fact that one dollar in China buys nearly twice what it does in the United States, the Chinese economy today is one-sixth larger than the US economy.

If this is just a bragging rights contest, choosing a measuring tool that allows Americans to feel better about themselves makes sense, says National Interest. 

But in the real world, a country’s GDP is the basis for its global power.

Over the past generation, given that China has created the largest economy in the world, it has replaced the United States as the largest trading partner of nearly every major country (only last year it added Germany to that list).

China has become the world’s largest manufacturing workshop, including face masks and other protective equipment as we are witnessing now in the Coronavirus crisis. 

Thanks to the double growth in its defense budget, China has steadily altered its military forces in the swing of power in potential regional disputes, particularly over Taiwan. 

This year, China will overtake the United States in spending on research and development, leading the United States to a “turning point in research and development” and future competitiveness.

For the United States to meet the Chinese challenge, says Graham Allison, a professor at Harvard Kennedy School, Americans must wake up to the “ugly truth”: China has already overtaken us in the race to become the world’s number one economy. 

Moreover, by the end of 2020, China will be the only major economy to record positive growth: the only economy that will be larger at the end of the year than it was when the year started. 

It is not difficult to predict the consequences for American security. 

Divergent economic growth will encourage a more assertive geopolitical player on the world stage, he said.

According to the IMF report, most major countries are expected to experience a deep recession this year, ranging from a contraction of 4% in America to nearly 10% in Britain. 

This is twice the depth of the contraction it experienced in 2009, following the global financial crisis. 

Among the largest economies, only China is expected to grow. 

In India, which in April was expected to grow 1.9% in 2020, it is now expected to shrink by 10.3%.

Just as some patients suffer from the long-term effects of the Covid-19, so too will the global economy suffer permanent damage, The Economist says. 

The IMF believes that even by 2025 global GDP per capita will be lower than expected at the beginning of the year, poor countries will be left behind. 

Five years from now, global growth is expected to reach only 4.7%, registering an historic and unprecedented decline.

Amid it all, the Economist says, there’s no need for sophisticated analysis to show that China is in a better economic position than most other countries these days, and all you have to do is take a look at its bustling malls, crowded rush hour roads and crowded tourist sites during Holidays