China’s GDP By PPP Now Bigger Than US

Posted by david on Dec 5, 2014 in Blog | 0 comments

The International Monetary Fund (IMF) forecasted this tectonic shift a few months back but now it is official – measured by purchasing power parity (PPP), China’s GDP is larger than the US’s.  Despite certain flaws, PPP is arguably a much better measure of domestic economic activity than GDP by exchange rate calculations.  (This doesn’t include the ‘gray economy’ – under-the-table activity that cannot be included in official statistics.  Some economists estimate that it may be as large as 1/4 of the economy.)

With the exception of rent and house buying in the biggest cities along with big-ticket items such as cars, major appliances, and hard wood furniture, basic living for the average Joe is fairly inexpensive.  A reasonable salary for office workers in the capital is around 5000 RMB/month but a significant portion of the population earns much less, especially migrants.  (Of course, the sky is the limit for high-flyers and MNC executives.)  Wages and prices generally decrease as you go down to second, third, and fourth-tier cities, especially if you move inland to central and western China, not to mention the countryside.

Just anecdotally, in Beijing, if you use a transit card that provides a discount, a ride on Beijing‘s plentiful buses within the 5th Ring Road costs just 0.4 to 0.8 kuai (RMB) or $0.065 to $0.13 and the rapidly expanding subway 2 kuai ($0.32) regardless of distance although tickets are going up in the new year and partially measured by distance.  Taxis will run you 14 kuai within 4 km, if not stuck in traffic.  Mediocre speed internet costs around 133 kuai ($21.70) a month if you pay for a full-year’s service.

If you buy at the farmer’s market, you can procure sufficient quantity and variety of vegetables and fruit for a week for less than 150 kuai.  Already cheap, shoppers constantly haggle with the farmers over price.  (Produce at supermarkets are usually marked up substantially.)  Of course, meat costs a lot more, especially beef and mutton but pork and farm-raised fish are more reasonable.  If you ride a bike, a flat tire can be fixed for 3 kuai and major parts replaced for less than 50.  Depending on your preference, a haircut can cost anywhere from 3 kuai on the street to 40+ in posh parlors.  (That translates to roughly US$0.49 to $6.5+).  As for vacations, 2000-3000 kuai can get you to Hong Kong/Macau, South Korea, Japan, or Southeast Asia for a few days.  Needless to say, domestic vacation packages are much cheaper.

But, let’s not be too congratulatory as the country still has a long way to go before its achieves developed status.  China’s exchange rate GDP will not catch up to the US for another decade or more.  Even measured by PPP, given that China’s population is roughly 4 times that of the US, its per capita income is only 1/4 of the US’s.  And there are still over 150-200 million people in remote areas living under $2 a day.  China does not yet have a medical care system that covers everyone and despite on-going reforms to the household registration system, migrants remain second-class citizens unable to reside permanently in the cities.

Conservatively speaking, it will take China another 40 years of sustained development before per capita living standards come close to that in the developed world.

 

There’s no easy way to say this, so I’ll just say it: We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world. For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet.

It just happened — and almost nobody noticed.

The International Monetary Fund recently released the latest numbers for the world economy. And when you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.

As recently as 2000, we produced nearly three times as much as the Chinese.

To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in real purchasing-power terms, compared with 16.3% for the U.S.

This latest economic earthquake follows the development last year when China surpassed the U.S. for the first time in terms of global trade.

I reported on this looming development over two years ago, but the moment came sooner than I or anyone else had predicted. China’s recent decision to bring gross domestic product calculations in line with international standards has revealed activity that had previously gone uncounted.

These calculations are based on a well-established and widely used economic measure known as purchasing-power parity (or PPP), which measures the actual output as opposed to fluctuations in exchange rates. So a Starbucks venti Frappucino served in Beijing counts the same as a venti Frappucino served in Minneapolis, regardless of what happens to be going on among foreign-exchange traders.

Make no mistake. This is a geopolitical earthquake with a high reading on the Richter scale.

PPP is the real way of comparing economies. It is one reported by the IMF and was, for example, the one used by McKinsey & Co. consultants back in the 1990s when they undertook a study of economic productivity on behalf of the British government.

– MarketWatch columnist