Is China Now Number One In Economy?

Each year I have done a post discussing the issue of when China will have the world’s largest economy. Lester Thurow says it won’t be until the 22nd century; I say it may have already happened.

Just to be clear, there is no “fact of the matter,” just as there is no fact of the matter as to whether China or the US is larger in terms of square miles. It’s what my students would call “merely a matter of opinion.” But let’s see if I can persuade some of my peers that China has the world’s largest economy in 2012. Here’s some estimates for 2012 that I found inThe Economist:

US $15,604bn $15,604bn
China $8,130bn $12,327bn
Hong Kong $262bn $373bn
Taiwan $518bn $1,007bn

Hong Kong and Taiwan figures are not included because I think they are “really part of China” (although Hong Kong really is part of China.) Instead, I’m puzzled by the PPP conversions of the three countries. Notice that the PPP GDP for China and Hong Kong are each about 50% larger than the nominal figures at current exchange rates, whereas for Taiwan the PPP figure is roughly double the nominal figure. I’ve never been to Taiwan, but I have trouble imagining how this could be correct.

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Taiwan is a very rich country, with a per capita GDP (PPP) roughly halfway between Japan and the US. How can their cost of living be much lower than that of China? A very nice haircut in Beijing cost me $2.25 in 2009. You can ride in a taxi for 15 minutes for $3. Restaurant meals are very cheap. Grocery store prices are quite low. A first class high speed rail ticket from Beijing to Tianjin (325 mph) is $10. Since wages are only a small fraction of US wages, lots of services are dirt cheap by US standards. It’s possible that the cost of living is far lower in wealthy Taiwan, as the Economist magazine claims, but I find it implausible. I am sure some of my readers travel to both places, so I’d be interested in your thoughts.

A few years ago the World Bank estimated the Chinese cost of living to be only 1/3 of US levels. Then they re-did the computation and found the ratio was 1/2. Even at that ratio China would have a larger economy than the US right now, even without including Hong Kong. Indeed that would still be true if we assumed the Taiwanese price level also applied to China.

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