Following all this reporting that followed the publication of the report on April 29, Jeffrey Frankel, professor of capital formation and growth at Harvard University in a commentary piece with CNBC today essentially rubbished the claims.
China vs U.S. GDP: It’s all in how you measure
While Frankel believes that the ICP’s work to be quite valuable he insists that the United States will continue to have the largest national economy for the foreseeable future. The data from the ICP compares GDP by utilizing purchasing-power-parity (PPP) exchange rates as opposed to market rates. While this works to measure living standards, Frankel doesn’t believe the measure accurate weighs a country’s economy around the globe.
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He points out that while China’s growth of around 10% annually for 30 years is nothing short of impressive, but that when market rates are used the United States economy is 83% larger than China’s. He predicts using this measure China is still eight to ten years away from surpassing the States.
Use a contemporaneous rate
In order to measure more accurately, Frankel suggests the use of the contemporaneous exchange rate. To do that simply multiply China’s RMB-measured GDP by the dollar to RMB exchange rate in order to now be able to compare the two economies in dollars. However, it’s not that simple as an RMB spent in China is more valuable than one spent outside the country. Essentially when you measure per capita income, China barely rises above Albania.
This is of course owing to the fact that China has a lot of people. When you take the per capita income and multiply it by roughly 1.35 billion you have a huge number that does indeed show the size of the country’s dynamic economy and why you don’t see too many Albania comparisons making the news.
Sure Qatar, Luxembourge, Monoco and others enjoy higher per capita income than the United States but their small populations account for this. The United States has a high income and a large population that falls only behind China and India with Indonesia catching up quickly.
End of the day, when using market rates the United States is still standing tall.