Monday, July 5, 2010

When Will China's Economy Become Bigger Than America's

By Stefan Karlsson

I have long argued that it is more or less inevitable that China's economy will in a not too distant future become the biggest in the world.

I am more convinced than ever of the truth of this prediction. Each year it seems, China passes at least one new milestone. In 2008, it surpassed Germany to become the third biggest economy. In 2009, it surpassed Germany as the biggest exporter and America as the biggest car market. In 2010, it will (barring a really dramatic yen appreciation) surpass Japan as the second biggest economy.

But exactly when will China surpass America as the world's biggest economy? Obviously, we can't for sure pinpoint the exact year it will definitely happen. But we can pinpoint using basic arithmetic just when it is likely to happen.

And the numbers clearly suggests that old estimates that the shift won't happen until 2040 or 2050 are far off the mark.

In 2009, nominal GDP in America was according to preliminary estimates, $14.26 trillion. In China, nominal GDP was 34.05 trillion yuan, or $4.98 trillion using the average 2009 exchange rate. That means that America's GDP was 2.86 times bigger.

With average annual growth in America being some 7.5 percentage points lower during the 2000s, then assuming that this will continue and that the real exchange rate of the yuan will appreciate by on average 3% per year (quite reasonable, given the reality of the Penn/Balassa-Samuelson effect and the strong pressure on China to make its currency stronger), then it will only take 11 years before the Chinese economy becomes bigger, meaning that by 2020, China's economy will be the biggest in the world.

If we assume that the growth differential falls to just 5%, while the estimated real appreciation is assumed to be just 2.5% per year, then China's economy will become bigger by 2024.

In order for the old estimate of 2040 to hold true, then we would have to assume a ridiculously low total growth differential and real appreciation of just 3.5% per year.

Read the rest here.


  1. I disagree. Reasons: 1. they do not really understand Capitalism (provate property, rule of law, free exchanfge, right of contract). they think selling the Us lots of stuff and saving the currency gained in Treasurys or gold or other stores of value is the vay to get richer; in fact selling us stuff and buying our stuff would benefit them on both sides of the transaction as each exchange would yield more value than traded away - of the exchange would not be made. They are some kind of neo-mercantilists. 2. They steal billions in intellectual property. Will the developed world allow China to ignore intellectual property rights when China is rich and powerful as the US? 3. Relies on pure extrapolation of existing trends. If the US gets economically freeer, we could have an explosion of 5% growth, an invention like the steam engine or the Internet could change the value of manufactured things relative to products of imagination (think of the Krell machine). The Us could go protectionist killing most of the other economies of the world.

  2. What happened to the Austrian business cycle theory? I guess it doesn't apply to China..

  3. every model relies on some extrapolation of existing trends.i think this is a pretty reasonable axpromiation...given the obvious trend that china understands capitalism more and more(they freed the curency recently for ex.)and the US less and less. i dont really see the problem with the intellectual property..well at least most of not through with this one.

  4. If this occurs it will be because they have more fully recognized individual human rights than they did in their past, and this is a very positive trend for all human beings.