China as #2

There is another round of news pieces about China becoming the world's second largest economy, for example the NYT headlined a piece that discussed this possibility, and NPR mentioned it in Morning Edition's top of the hour news segment. This is really really silly. China has long been the second largest economy using a purchasing parity measure of GDP. It is already close to twice the size of Japan's economy. Purchasing power parity measures the output of an economy using a common set of prices for goods and services for all countries. The exchange rate measure is arbitrary since exchange rates fluctuate widely and in the case of China is set by the government. For example, if China's government had opted to raise the value of the yuan by 20 percent against the dollar (probably still leaving it somewhat under-valued), its economy would have been larger than Japan's by an exchange rate measure 2-3 years ago.

--Dean Baker