China Likely to Become the World’s Largest Economy

It would appear that China, the world’s second largest economy, is getting ready to replace the United States as number one. India, once in tenth place, is now in third place, and has pushed Japan into fourth place.

The International Comparison Program (ICP), which works alongside the World Bank looks at the purchasing power parity (PPP) of different nations along with estimating real living costs to assess which countries have the biggest economies. The data from the 2011 report, which is the latest, shows a much different global economic picture since their last release in 2005. The report puts China’s gross domestic product (GDP) at nearly 87 percent of the United States GDP in 2011. China’s GDP was at 43 percent in 2005. China’s economy has doubled in size, over a seven year period, in comparison to the U.S.

For now, the U.S. is still the world’s largest economy. However, it becoming overpowered by China when we measure the economies in PPPs. India, is also picking up momentum and Japan has fallen into fourth place. The report also shows only a few of the smaller economies have the greatest share of the global economy. However, this is very important, the economies of China and India have grown at a pace more than twice of the U.S.

China’s Economy Experiencing Rapid Growth

Over the last couple of decades, China’s economy has been undergoing a period of rapid growth. This is leading many economists to believe it will take over as the world’s largest economy within the next few years. However this report this can happen sooner than later. Some now believe this could happen as soon as 2015.

How reliable is this report?

Economies tend to estimate their GDP by using price levels in their local currencies. This makes a local GDP hard to compare with other global economies. The ICP uses a system that evaluates economies with a common price level. They then compare these economies, with a common currency. This is why the use purchasing power parity. However, this technique is not easy. It is very tricky and takes into account many different assumptions.

There is no doubt that both China and India are very large economies with huge populations. This gives them a tremendous labor pool and room to grow, but these PPP measures should not be used as a tell-all for economic strength. For example, the ICP, and economists in general, measure international purchasing power that is expressed in the U.S. dollar. This is what matters in today’s global economy and international trade. When you take this fact into account, the economies of the U.S., Europe and Japan still dominate.

China’s Economy Continues to Expand and India Shines

China’s economy expanded at 7.4 percent in the first quarter of 2014. This was below the 7.4 percent growth rate for Q1 of 2013, but shows that their economy continues to expand faster than any of the other developed economies. An advanced reading for the U.S. economy shows that it will expand only 1.2 percent for the first quarter of 2014.

Looking at India, data shows that India has something to smile about. Last year India was under fire for not sufficiently addressing its current account deficit, which was enormous and widening. Since then, they have implemented structural reforms to combat this and their economy has been expanding well enough to jump from the tenth largest economy in 2005 to surpass Japan in the current ICP report.

The ICP study is a gauge to show us how well countries like India and China have progressed. The study reveals how much larger these economies are than first realized. China is not fully on board with this study. China’s National Bureau of Statistics, which took part in the survey rejected the report’s conclusion. They are not convinced, expressing reservations, with methodology.