Published On: Thu, Oct 9th, 2014

China overtook the U.S. as the World’s No.1 Economy

nsnbc : China has overtaken the United States as the world’s largest economy, states the International Monetary Fund (IMF), referring to a misrepresentation of the U.S. as No.1 by not taking the purchasing power into account. 

yuan_China_moneyIn an article, entitled “PPP versus the Market: Which Weight Matters?”, Tim Callen, the chief of the World Economic Studies Division of the IMF Research Department explains, that the perception of the U.S.as leading economy is based on an analysis of its contribution to global growth, (in dollar), while China clearly leads as the world’s no.1 economy when the purchasing power parity (PPP) model is used to determine the relative strength of an economy.

Global Growth_Statistic_IMF_China_USA

Click on the image to enlarge.

The logic behind the use of the PPP analysis is that prices are not identical. Callen uses the Economist’s Big Mac Index and the fact that a shirt will cost less in e.g. Shanghai than it would cost in San Francisco. The IMF measures the GDP both in terms of market-exchange and in terms of purchasing power. China has a clear No.1 position with regard to purchasing power and is likely to also achieve that position with regard to GDP measured in terms of the market-exchange.

Factors behind the latter development are, e.g. the establishment of the BRICS Development Bank, the fact that an increasing number of Asian nations, like Thailand and Malaysia are encouraging their investors to examine the advantages they can achieve by making use of liberalizations within China’s economy, and the fact that the U.S. dollar as global exchange currency is largely dependent on colossal military spending to keep nations who want to investigate attractive alternatives to the Bretton Woods system and the petro-dollar subjugated.

The IMF’s Tim Callen states that China. by the end of 2014, will make up 16.48% of the world’s purchasing power, adjusted to GDP, that would be $17.632 trillion, and that the United States will make up 16.28% or $17.416 trillion.

CH/L – nsnbc 09.10.2014

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