Who is Number 1?

Published on Author barryp17

A common question in today’s modern economy asks whether China will overtake the United States as the world’s foremost economic power.  The price data produced by the International Comparison Program (ICP) states that China will overtake the United States this year.  But according to Jeffery Frankel of Harvard University, this finding is due to a manipulation and misuse of statistics.  He states that this claim is incorrect, rather that the United States still remains at the top by a substantial margin.

In order to compare two countries’s GDPs, the ICP employs PPP rates in lieu of the exchange rates. The figure below shows the difference in projections, whether one uses PPP rates versus exchange rate.




The argument arises because Frankel states that PPP rates apply more to measure the individual living standards of a country versus the country’s position in the global economy.  Rather than describing how much the RMB can buy on the international scale, the PPP measurement deals more with local, non-tradeable goods.  When looking at the exchange rates, the US vastly outweighs China.  Nevertheless due to its rapid growth and high inflation rate, exchange rates predict China will overcome the US in the year 2021.

The use of the PPP rates misleads people into believing that China will overtake the US as the world’s economic power, but in reality when looking at current exchange rates for a national economy, that way of thinking is debunked.  If China continues on their path, then in the future they will overtake the US, but currently the US remains the foremost economic power.


One Response to Who is Number 1?

  1. Good on noting the strengths and limits of PPP.

    Even if China is not yet #3 (after the US and European Union), it is still one of the biggest global traders. It’s a huge holder of international financial assets. A huge polluter. A huge fishing fleet. A huge source of R&D. No matter what metric you use, the economy is large.