Basically, the method used by the IMF adjusts for purchasing power parity, explained here.
The simple logic is that prices aren’t the same in each country: A shirt will cost you less in Shanghai than San Francisco, so it’s not entirely reasonable to compare countries without taking this into account.
Though a typical person in China earns a lot less than the typical person in the US, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have. The Economist’s Big Mac Index is a great example of these disparities.
So the IMF measures both GDP in market exchange terms, and in terms of purchasing power. On the purchasing power basis, China is overtaking the US right about now and becoming the world’s biggest economy.
We’ve just gone past that cross-over on the chart below, according to the IMF. By the end of 2014, China will make up 16.48% of the world’s purchasing-power adjusted GDP (or $US17.632 trillion), and the US will make up just 16.28% (or $US17.416 trillion):
Adjusted for purchasing power, the IMF thinks China’s economy is now the world’s largest.
It’s not all sore news for the US. It will be some time yet until the lines cross over in raw terms, not adjusted for purchasing power. By that measure, China still sits more than $US6.5 trillion lower than the US and isn’t likely to overtake for quite some time:
But in terms of the raw market value of China’s currency, it still has a long way to go.
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