China likely to pip US as world’s biggest economy this year

fe Bureau Posted online: Thursday, May 01, 2014 at 0000 hrs
New Delhi : As per the more widely used exchange rate-based estimate, the US economy was almost double the size of China’s even as late as 2012. But the assessment at a common price level, a more pertinent one, would indicate the professedly communist country outdoing the US to become the world’s largest economy this year, well ahead of the previously thought 2019, reports

fe Bureau in New Delhi.

Gauged by purchasing power parity (PPP), China’s economy was already 87% of that of the US in 2011, a sharp climb up from 45% in 2005, going by the 2011 Round of the World Bank’s International Comparison Program (ICP) released recently.

What bolsters the prediction is the fact that China’s economy grew 24% between 2011 and 2014 while the US is believed to have expanded only 7.6% during the period.

The world economy’s reorganisation aided by rapid strides by emerging and developing countries was also reflected in India zooming past Japan and seven other countries to be the third largest economy in terms of PPP in 2011. Only the US and China were ahead of India. India’s economy was 37% of US’ on a PPP basis, a great improvement from 18.9% in 2005, revealed the World Bank-ICP report.

“The six largest middle-income economies — China, India, Russia, Brazil, Indonesia and Mexico — account for 32.3% of world GDP, whereas the six largest high-income economies — US, Japan, Germany, France, United Kingdom, and Italy — account for 32.9%,” the report said. Clearly, things have already evened out.

The ICP’s is by far the most extensive effort to gauge PPPs across countries. Put differently, the US’ share in world GDP according to PPP was 17.1% in 2011 and that of China 14.9%. India’s was 6.4%.

Going forward, the investment expenditure figures put out by ICP clearly indicate that the balance of economic power could tilt more decisively in favour of countries in the Asia and the Pacific region. “At 27%, China now has the largest share of the world’s expenditure for investment (gross fixed capital formation); followed by the US at 13%. India, Japan and Indonesia follow with 7%, 4% and 3%, respectively,” the report said.

PPP estimates reveal the real cost of living and are considered a better measure than one using volatile exchange rates to estimate the size of economies. The International Monetary Fund has estimated the US GDP in 2012 at $16.2 trillion and China’s at $8.2 trillion. As per the ICP’s new data, the world economy produced goods and services worth over $90 trillion in 2011, and almost half of the world’s total output came from low- and middle-income countries.

But the ICP admitted to the limitations of the data. “The ICP is designed to compare levels of economic activity across economies, expressed in a common currency, in a particular benchmark year. As such, PPP-based expenditures are not directly comparable with the 2005 ICP round estimates because they are based on two different price levels,” the report said.