PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Who Has a Bigger Economy – U.S. or China?

By at 22 April, 2016, 9:36 pm

usa x china

by Raymond J. Keating-

When it comes to China vs. the U.S. on economic matters, there’s a great deal of bad economics and fear mongering going on in the political arena. Just look at what’s being said on the trade front.

Besides trade, another issue that pops up on occasion – and generating a wide array of reactions – is the size of each economy. Does the U.S. still have the largest economy, or has China passed us by?

Before we look at the actual data, there is an important point to highlight here. That is, U.S. economic growth has badly underperformed during the twenty-first century. During this economic recovery, for example, real annual GDP growth has averaged a mere 2.1 percent, while growth should be more than double that rate during a recovery/expansion period. Since the start of this last recession, real growth has averaged a mere 1.2 percent, and even since the start of 2001, real annual GDP growth has averaged only 1.9 percent. That compares to real GDP growth from 1950 to 2000 of 3.8 percent. In effect, the U.S. has experienced a lost decade-and-a-half in terms of economic growth … and still counting.

Having said that, the comparison to China needs sober assessment.

Let’s first look at the overall size of GDP in each nation. By one measure – each nation’s GDP expressed in US dollars – the US has the largest economy at $17.9 trillion, with China coming in second at $11 trillion.

Another popular measure is GDP based on PPP valuation. (As noted by knoema.com and explained by the World Bank: “Purchasing power parity (PPP) between two countries, A and B, is the ratio of the number of units of country A’s currency needed to purchase in country A the same quantity of a specific good or service as one unit of country B’s currency will purchase in country B. PPPs can be expressed in the currency of either of the countries. In practice, they are usually computed among large numbers of countries and expressed in terms of a single currency, with the US dollar (US$) most commonly used as the base or ‘numeraire’ currency.”)

According to GDP based on PPP, China has the largest economy at $19.4 trillion, with the U.S. coming in second at $17.9 trillion.

But, further adjustments are needed. Namely, population has to be factored into the equation. When that is done, the U.S. economy is far larger than China’s. Indeed, China still ranks as a developing nation.

Consider that based on the US dollar measure, U.S. per capita GDP comes in at $55,805, while China’s registered a mere $7,990. And in terms of per capita GDP based on PPP, the United States’ $55,805 still far outdistances China’s $14,107.

It’s not even close.

So, for all of the economic problems or challenges the U.S. currently faces, the size of China’s economy relative to the U.S. economy is not a serious concern. It’s also worth keeping in mind that a larger, wealthier Chinese economy would be good news for the U.S., as the economy is not a zero-sum game, and growth elsewhere means more opportunity for U.S. entrepreneurs, businesses and workers, that is, as long as open trade advances. 

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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