China’s Economy: Bigger than the USA? Really? Already? Soon?

China has long been the world’s largest nation in terms of population. But only since undertaking radical economic reforms in the late 1970s did the country’s economy begin to prosper again. We wonder: When will China overtake the United States as the world’s largest economy?

A. It already has.
B. It will by 2028.
C. It will by 2050.
D. Probably not in this century.

A. It already has … is correct.

China’s re-emergence as an economic superpower began in the late 1970s, when then leader Deng Xiaoping introduced a series of economic reforms that came to be known as “socialism with Chinese characteristics.” Deng’s reforms emphasized modernization, openness to foreign trade and investment and privatization of state-owned companies — all of which provided a sustained growth impulse.

By 2013, the Chinese economy had grown to $16.1 trillion, measured at purchasing power parity. U.S. GDP stood at $16.8 trillion at that time — or just about 4% larger than China’s economy.

Given China’s higher economic growth rate, at some point during 2014 China overtook the United States as the world’s largest economy. The IMF estimates that China’s GDP at purchasing power parity was $17.6 trillion at the end of 2014 — or about 1% larger than the U.S. GDP of $17.4 trillion.

Measuring GDP at purchasing power parity takes into account the differences in prices that people pay for goods and services in different economies. Since the price level in China is still much lower than in the United States, a dollar in China buys much more than a dollar in the United States.

B. It will by 2028 … is correct.

Back in 1980, the size of China’s economy was just $309 billion, as measured at market exchange rates in U.S. dollars. That was roughly a tenth of the size of the U.S. economy in 1980 ($2.9 trillion).

By 2014, the gap between the size of the $10.4 trillion Chinese economy and the $17.4 trillion U.S. economy had narrowed to just 40%.

Measuring GDP at market exchange rates simply converts the value of all goods and services produced in each economy into a single currency (in this case U.S. dollars) using the current exchange rate. This gives us a good idea of how large economies are relative to one another — similar to the way we compare the height of two people by having them stand back to back.

While China’s growth has slowed considerably compared to the 10% annual growth rates of the past few decades, it is still expected to maintain a significant growth advantage over advanced industrial economies such as the United States.

Consulting firm PricewaterhouseCoopers projects that China will grow at an annual rate of 4.6% between now and 2050, while the United States will grow by 2.4% a year. Assuming no significant event (such as military conflict, political revolution or natural disaster) causes either country to deviate from these trajectories, China’s GDP at market exchange rates should overtake U.S. GDP in 2028.

C. It will by 2050 … is not correct.

By mid-century, China will almost certainly have long secured its spot at the top of the global economic league table. However, by 2050 it is possible that the U.S. economy will not just be smaller than China’s, but India’s as well.

A little more than a decade after China launched its market-based reforms, India jumped into the growth game as well. India’s economic liberalization policies, inaugurated in 1991, led to an increasing role for the private sector and opened the economy to foreign investment.

As of 2014, India’s $7.3 trillion economy was the world’s third-largest, measured in terms of purchasing power parity. However, it is at present only a little over 40% as large as the U.S. and Chinese economies.

While India’s growth has not been as strong as China’s over the past two decades, its growth rate is expected to outpace China’s in the coming decades. To realize this potential, India will need to sustain its reform policies and increase investment in infrastructure, education (especially women) and better governance.

According to PricewaterhouseCoopers, the Indian economy is expected to be about 2% larger than the U.S. economy by mid-century — but about 30% smaller than China’s.

D. Probably not in this century … is correct.

China’s three and a half decades of remarkable economic growth have lifted about 500 million people out of poverty, according to the World Bank.

Despite this transformation, however, China’s per capita income remains only a fraction of the U.S. level. In 2014, China’s per capita GDP of $12,890 (measured at purchasing power parity) was less than a fourth of U.S. per capita GDP ($54,680).

New forecasts of long-term economic growth by PricewaterhouseCoopers estimate that between 2014 and 2050, China’s per capita GDP will grow at nearly double the U.S. rate (an average of 3.4% per year, compared to 1.8%). Even so, China’s per capita GDP will equal only 42% of the U.S. level by 2050.

Even if China’s growth advantage remains this large for the rest of the century, its per capita GDP will still only reach about 90% of U.S. per capita GDP.

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