When will China ‘overtake’ America?

At some point the United States ‘overtook’ Britain as a global power and many people fret (or celebrate) that one day China will ‘overtake’ the US. I’ve used inverted commas on purpose. What does ‘overtake’ mean? If the conversation is between economists, they are probably talking about the crucial concept of GDP.

It’s not so long since Nigeria’s GDP surpassed that of South Africa (although that was mainly down to issues with measurement). According to The Economist, China is on the verge of becoming the world’s mightiest country. There’s a tool for you to work it out for yourself here.

Comparing the economic output of countries is tricky. The most straightforward way is to convert GDPs into a single currency (usually dollars) at market exchange rates. This is a good way to gauge countries’ international heft, and by this measure China’s economy is still 43% smaller than America’s. But for comparing living standards or growth rates, market exchange rates can be misleading. Exchange rates can be volatile, yielding vastly different GDP values on different days. Governments often meddle with them. Most important, they are influenced by prices for internationally traded items, but they do not reflect the cost of purely domestic goods and services, such as haircuts or bus rides. Since rich-world barbers are more expensive than those in poor economies but not vastly more productive, using market exchange rates to compare GDPs understates the productive capacity and living standards of the emerging world.

In an attempt to allow for such things, statisticians collate the cost of comparable goods and services in different countries. They then adjust output figures to take account of the lower cost of those items in poorer countries—a method known as purchasing-power parity (PPP). The Economist’s Big Mac index is based on the same premise, although it looks at the price of just one item.

Using PPP, China’s economy will soon be bigger than America’s. It’s still miles off in terms of GDP per capita, however. It’s also worth remembering that this discussion is quite different to the question about the relationship between GDP and standards of living, or economic development.