China Replaces U.S. as World’s Largest Economy, IMF Reports

Has the era of American economic hegemony finally come to an end?

According to a new IMF report, China has now surpassed the U.S as the world’s largest economy.

The data show that China’s share of the global economy, adjusted for cost of living, is now slightly bigger than that of the United States. China’s gross domestic product is worth $17.6 trillion, when adjusted, compared with $17.4 trillion for the U.S. This was calculated by examining gross domestic product (GDP) alongside cost of living, or purchasing power parity (PPP).

Although this announcement signals an inevitable global shift, the U.S. continues to dominate in other important aspects. In terms of overall size (not adjusted for PPP), the U.S. economy still dwarfs China’s, at $17.4 trillion to $10.4 trillion.

As Business Insider explains, this report is derived from one set of calculations and does not constitute a direct comparison of the two economies:

The simple logic is that prices aren’t the same in each country: A shirt will cost you less in Shanghai than in San Francisco, so it’s not entirely reasonable to compare countries without taking this into account. Though a typical person in China earns a lot less than the typical person in the US, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have. The Economist’s Big Mac Index is a great example of these disparities.

So the IMF measures both GDP in market-exchange terms and in terms of purchasing power. On the purchasing-power basis, China is overtaking the US right about now and becoming the world’s biggest economy. […]

It’s not all sour news for the US. It’ll be some time yet until the lines cross over in raw terms, not adjusted for purchasing power. By that measure, China still sits more than $6.5 trillion lower than the US and isn’t likely to overtake for quite some time.

— Posted by Roisin Davis