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Size matters, but so does how it is calculated

By Zheng Yanpeng (China Daily) Updated: 2014-10-14 11:21

China has overtaken the United States as the world's largest economy this year, according to the International Monetary Fund's latest estimate. But unlike four years ago, when China eclipsed Japan as the world's second-largest economy, this time the news sparked muted reaction and doubts.

Measuring GDP using purchasing power parity, the IMF estimated China's GDP at $17.6 trillion, against $17.4 trillion for the US, ending the latter's position at the top that it held since 1872.

One reason for the doubts is that not everyone agrees about the validity of measuring GDP in terms of PPP.

Domestic media were quick to point to flaws in the PPP calculation, saying this method tends to overestimate developing countries' economic might.

Economists noted that measured by nominal GDP, a more common method of making cross-country comparisons, China's GDP in 2013 was 55 percent of that of the US.

Comparing figures for per capita GDP were even more revealing: China's per capita GDP, standing at $6,807 in 2013, was just 12.8 percent of that of the US.

Even in PPP terms, China's GDP per capita was only 22.4 percent of that of the US.

Some commentators even speculated that the IMF's announcement was meant to "disarm" China by excessively complimenting it. There is no evidence to back up that interpretation. Despite its irrelevance in ordinary people's lives, PPP can help economists understand different nations' economic strengths and overcome exchange-rate distortions.

But even GDP measured in PPP terms is one way to understand the sheer size of the economy, Chinese people know well that the country has many goals beyond the pursuit of GDP.

It is logical that China, with its vast area and the world's largest population, would eventually have the largest economy. But size does not make one great.

"China will definitely be the largest economic power, sooner or later. But that is not what ordinary Chinese care about. At the end of the day, ordinary Chinese care about their incomes," Alfred Schipke, senior resident representative of the IMF in China, said in May after similar economic claims emerged.

Speaking of incomes, China has more reasons to worry than to celebrate. Leaving aside the nation's vast income disparities, household incomes have remained disproportionately small while government income has grown disproportionately large in the composition of GDP.

Size matters, but so does how it is calculated

Size matters, but so does how it is calculated

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