Will China excel US in 2016?

The publication of the latest World Economic Outlook (WEO) last month by the International Monetary Fund (IMF) has drawn much attention for an unexpected reason. According to the half-yearly WEO report, China's GDP is expected to surpass that of the United States by 2016. Less attention is paid, however, to the measure in which this comparison is made.

When comparing the value of different countries' output, each country's statistics in local currency must be converted into a common currency. However, the selection of a measure for the conversion depends on what one wants to compare.

In the WEO, the IMF uses the purchasing power parity (PPP)-adjusted GDP. This is a yardstick that tries to measure the total volume of goods and services produced in one country with that of another. To do so, currencies are converted using the PPP exchange rate, which is a relative price that ensures the same purchasing power of broadly similar basket of goods and services across countries.