Friday, November 12, 2010

Chinese Economy Bigger Than U.S. in Two Years?

« High-rise buildings are seen from the financial district of Shanghai.
(Philippe Lopez/AFP/Getty Images)
China’s economy may surpass that of the U.S. in just two years. According to analysts at the Conference Board, an economic research association, China may be the world’s biggest economy by 2012—and nearly half as big again as the U.S. in less than a decade. The Telegraph reports: “[T]he Conference Board’s projections show China as 24.1 percent of world output by 2020, and the U.S. at just 14.8 percent” (November 10).
The only good news is that the Conference Board study was based upon “purchasing power parity,” not absolute terms. Purchasing power parity is a way to measure the strength of an economy by the volume of the goods and services it produces—not how much those goods and services are sold for in their home market.
For example, median salaries in China might be only $6,000 per year, while those in America are around $45,000, but the cost of living in China is also much lower. In America, a taxi ride might cost you $20, while the same taxi ride costs only $2 in China. In absolute terms, that $20 counts toward America’s gross domestic product, while in China that same service only contributes $2 toward its gdp. In contrast, the purchasing power parity measure places an equal weighting on these two services when computing the size of the economy.
In other words, what the Conference Board is saying is that in terms of what is produced, and what those goods sell for in their home market, China is rapidly catching up to the U.S.
In absolute terms, China’s economy is still approximately one quarter the size of that of the U.S. and analysts predict that at current growth rates, it will take China at least two decades to surpass the U.S. However, those predictions could change dramatically if the U.S. economy doesn’t start growing again, or if the dollar crashes.
Regardless of how you measure it, America’s relative influence in the world is rapidly shrinking. The Telegraph continues:
We all knew that the weight of economic growth had skewed dramatically since the crisis from advanced to emerging market economies, but many in the West don’t yet seem fully to appreciate the speed with which economic and geopolitical power is shifting. This is a truly seismic change. How these once irrelevant economies choose to use their newfound power is the overarching question of our time.
As the Telegraph’s Jeremy Warner highlights, the overarching question of our time is where these “seismic” geopolitical power shifts are leading.