The American political and chattering classes are obsessed with the rise of China and America’s “economic competition” with the world’s most populous nation.
President Obama himself often uses the language of competition to describe the reasons for his policy proposals, like education initiatives that will help us fend off countries like China and India hoping to “out-educate and out-compete” us. And if economics is a competition, then the best measure of success must be GDP, which economists use to measure the total value of goods and services a country produces.
In coming years, we’ll hear a lot about the size of China’s economy surpassing that of the United States. The latest prediction is out from the Centre for Economics and Business Research, which says that the Chinese economy will grow larger than America’s in 2028.
This is actually much later than some forecasts predict. The OECD for instance argues that China’s economy will be bigger than America’s by 2016. And other economists like Peterson Institute for International Economics’ Arvind Subramanian predict that China’s economy is already bigger than the United States’.
How can these estimates be so far apart? The main reason is that it’s difficult to compare different country’s economies when they use different currencies and when the citizens of those countries have much different purchasing power.
For instance, 1 U.S. dollar is worth 6.05 yuan. So a simplistic way of comparing U.S. and Chinese GDP would be to divide Chinese GDP in Yuan by 6.05. But in reality, prices in the U.S. are somewhat higher than those in China, so 6.05 in Yuan isn’t going to buy the same amount of goods in the U.S. as it would in China. This is why economists try to estimate exchange rates adjusted for purchasing power. And it’s through this process of estimating differences in purchasing power that you get such different estimates of GDP.
The upshot is that the Chinese economy could already be bigger than our own. Does this knowledge make you feel any different? No? Well, it shouldn’t. That’s because, fortunately, economics isn’t about competition. It’s about collaboration. Americans should hope for the Chinese economy to grow because that means there will be a larger market for the goods and services we create here in the U.S.
And in terms of economic output per capita, the U.S. is way ahead of China by a factor of more than 8. That’s because there are far fewer Americans than Chinese, so even if Chinese output equals America’s, there’s a lot fewer people here that must share in it. In other words, the average American is far wealthier than the average Chinese, and will be for many years to come.