This is not a grand existential question; I am referring to the size of its economy. According to most news reports, China's GDP is approaching $2 trillion, rivaling Germany for the #3 ranking in the world, behind the United States and Japan. In fact, this figure grossly understates the size of China's economy. It is already far larger than Japan's economy and is likely to surpass the size of the U.S. economy in less than a decade. The error is simple. The standard number reported for China's GDP is based on a "currency conversion" measure of GDP. This method takes China's GDP, calculated in its own currency, and then converts this number into dollars, using the official exchange rate. However, China's currency is hugely under-valued, so this method provides a very poor measure of the value of goods and services produced in China each year. The method preferred by economists for most comparative purposes is a "purchasing power parity" measure. This measure adds up GDP by using the same set of prices for all the goods and services in all countries. In other words, it applies the same price to a bushel of wheat or a haircut in China as to a bushel of wheat or a haircut in the United States. According to the CIA's World Factbook, China's purchasing power parity GDP in 2005 was $8.2 trillion. This compares to a U.S. GDP of $12.5 trillion. Adding in Hong Kong's GDP puts the size of China's economy at $8.4 trillion in 2005, just over two-thirds the size of the U.S. economy. China's economy has been growing at the rate of 8-9 percent a year, and most projections assume that it will maintain this rate of growth for the near future. If China's economy grows at the rate of 7 percent annually, its GDP will be approximately $16.5 trillion in 2015, almost the same as the projected $16.8 trillion GDP for the United States (both numbers in 2005 dollars). At 8 percent growth, China's GDP will be $18.1 trillion in 2015, and at 9 percent growth it will be $19.9 trillion. There is considerable inaccuracy in international comparisons of GDP, but the basic point is that China's economy will be approximating the size of the U.S. economy in the near future, and under plausible growth assumptions, will soon be considerably larger. This has important implications for the position of the United States and China in the world. I will allow others to work through those implications, but we have to start by recognizing how big China actually is.
--Dean Baker
