China has now displaced the U.S. to become the largest economy in the world stated in the latest International Monetary Fund (IMF) report.
The IMF, using the more reliable and now widely accepted yardstick, called the Purchasing Power Parity (PPP), has determined China’s economy at $24.2 trillion compared to America’s $20.8 trillion (one-sixth larger than the U.S. economy).
The PPP calculation method used by both IMF and CIA compares how much one can buy for their money in different countries.
However, there are differences in calculating one nation’s GDP between PPP and traditionally used MER (market exchange rate).
Traditionally, economists have used a metric called MER (market exchange rates) to calculate GDP. The U.S. economy is taken as the baseline. For other nations’ economies, this method adds up all goods and services produced by their economy in their own currency and then converts that total into U.S. dollars at the current ‘market exchange rate.’
While MER answers how much Chinese would get at American prices, PPP answers how much Chinese do get at Chinese prices.
If the Chinese converted their yuan to dollars, bought Big Macs in the U.S., and took them home on the plane to China to consume them, comparing the Chinese and U.S. economies using the MER yardstick would be appropriate. But instead, they buy them at one of the 3300 McDonald’s locations in their home country where they cost half what Americans pay.
In summary, while the yardstick most Americans are accustomed to still shows that the Chinese economy is one-third smaller than the U.S., when one recognizes the fact that $1 buys nearly twice as much in China than in the U.S., the Chinese economy today is one-sixth larger than the U.S. economy.