Economy: We’re #2 ?

IMF Headquarters 1 in Washington D.C.

According to MarketWatch, the Chinese economy just overtook the United States economy to become the largest in the world. “For the first time since Ulysses S. Grant was president, America is not the leading economic power on the planet,” states MarketWatch.

The International Monetary Fund (IMF) released the latest numbers for the world economy. When you measure national economic output in “real” terms of goods and services, China will this year produce $17.6 trillion — compared with $17.4 trillion for the U.S.A.

To put the numbers slightly differently, China now accounts for 16.5% of the global economy when measured in real purchasing-power terms, compared with 16.3% for the U.S.

China’s recent decision to bring gross domestic product calculations in line with international standards has revealed activity that had previously gone uncounted.

As recently as 2000, the U.S. produced nearly three times as much as the Chinese.

The calculations are based on a well-established and widely used economic measure known as purchasing-power parity (or PPP), which measures the actual output as opposed to fluctuations in exchange rates. So a Starbucks venti Frappucino (or a Big Mac) served in Beijing counts the same as one served in Minneapolis, regardless of what happens to be going on among foreign-exchange traders.

PPP is the “real” way of comparing economies: it is “exchange-rate-adjusted.” It is the one reported by the IMF and was, for example, the one used by McKinsey & Co. consultants back in the 1990s when they undertook a study of economic productivity on behalf of the British government.

When you exclude the PPP, the U.S. economy remains allegedly almost 70% bigger than that of China.

But many economists or financial institutions consider such measures largely meaningless. Does the U.S. economy really shrink if the dollar falls 10% on international currency markets? Does the recent plunge in the yen mean the Japanese economy is vanishing?

Back in 2012, the IMF tried to challenge the importance of PPP, for reasons of ideology.  It is not in anyone’s interest at the IMF that people in the Western world start focusing too much on the sheer extent of China’s power.

However, when the IMF’s official World Economic Outlook compares countries by their share of world output, it does so using PPP.

All statistics are open to possible dispute. It is possible China’s latest numbers overstate output — or understate them. That may also be true of U.S. GDP figures. But according to MarketWatch, the IMF data are “the best we have.”

This will not change anything in the short term, but it will change much in the long term.

We have lived in a world dominated by the U.S. since at least 1945 and, in many ways, since the late 19th century.  However, throughout history, political and military power have always depended on economic power.