Will the U.S. Remain The Largest Economy in 2020?

In a previous article (read here), we compared U.S. and China’s GDP as well as GDP per capita. Some economists forecast China’s GDP will overtake the U.S. by 2030 or sooner, assuming China’s growth rate will continue in the present fashion. However, the fact is that China’s economy has slowed while U.S.’s has accelerated - during the era of President Xi Jinping.

Comparisons of GDP across countries is generally achieved by conversion to US dollars at the market exchange rate. However, many emerging and developing economies appear relatively smaller when local currency GDP is converted to US dollars using market exchange rates. Therefore, the weights assigned to emerging and developing economies in the calculation of global growth can be smaller when GDP is calculated by market exchange rate, potentially skewing global growth measurement and subsequent comparisons.

The PPP exchange rate between two currencies on the other hand is the rate at which both currencies buy the same quantity of goods and services in each country. Using PPP exchange rates to measure GDP are relatively more stable than market exchange rates. Besides, PPP takes into account nontraded goods and services unlike market exchange rates.

When measured by a combination of the countries’ PPP exchange rates and nominal GDP, China is likely to overtake U.S. as the world’s biggest economy as early as 2020, according to Standard Chartered Bank. In fact, by using PPP alone, China is already considered the world’s largest economy, although on a nominal basis the US remains in the lead.

The forecasted shakeup is mostly stimulated by a strengthening of the middle class in Asian countries, according to the report. “By 2020, a majority of the world population will be classified as middle class. Asia will lead the increase in middle-class populations even as middle classes stagnate in the West.”

Not only China, by 2030, the researchers estimate that India will overtake the U.S. economy as well, with annual GDP growth set to accelerate from about 6% now to almost 8% in the coming decade, partly due to ongoing reforms, including the introduction of a national goods and services tax (GST) and the Indian Bankruptcy Code.

Ben Chu from The Independent said: "The reason why China is larger than the U.S. at PPP exchange rates is because it has a population four times larger. If one measures GDP at PPP per person a very different picture emerges, with China on $18,000 and the US on $63,000." Always keep in mind that these kinds of economic predictions do not necessarily gives you an accurate picture of the standards of life in a given country. A country with a bigger economy doesn't necessarily mean it has more freedom, higher wellbeing or better institutions.

Reference:

1. China will overtake the U.S. as world’s top economy in 2020, says Standard Chartered Bank, Big Think, 14 January 2019

2. The US could lose its crown as the world’s most powerful economy as soon as next year, and it’s unlikely to ever get it back, Business Insider, 10 January 2019

3. Lester Gunnion, Comparing economies: How is economic size measured and why does it matter? www.deloitte.com