China Economy Surpasses US In Purchasing Power, But Americans Don't Need To Worry

The International Monetary Fund announced Wednesday that China's economy, when measured by purchasing power parity (PPP), surpassed that of the United States to become the world's largest. It's a significant milestone in China's evolution into a global economic power. For the U.S., which has occupied the top slot since 1872, the news may cause some alarm: American politicians, including 2012 Republican presidential candidate Mitt Romney, have periodically worried about the consequences of China's future economic superiority. But while PPP presents an intriguing snapshot into China's economy, a closer look at what the numbers mean should lessen American alarm.

The central utility of PPP is that, unlike conventional GDP, it accounts for national differences in the cost of living. For example, men can obtain similar haircuts in both China and the United States; but in China, where labor and rent are lower, haircuts cost much less than they do in the U.S.. Put another way, a man in China can obtain more haircuts with $30 than he could in the U.S. The PPP takes that differential into account and thus tends to present developing countries like China as having more wealth than normal GDP indicates.

However, PPP is less useful when measuring goods and services, like air-craft carriers or international shipping rates, that cannot be adjusted for cost of living. For a broader look at an economy's health, nominal GDP -- which represents the sum total of goods and services produced in a country -- is more useful. By this measurement, the U.S. continues to hold a significant advantage: In 2013 the U.S. GDP was $16.72 trillion, whereas China's GDP equaled a mere $9.33 trillion. Considering that China has used its growing wealth to, among other things, greatly improve its military capacity, conventional GDP remains significant.

In addition, economists have argued that neither nominal nor PPP forms of GDP can adequately describe the overall strength of China's economy. Leland Miller, whose China Beige Book surveys firms to measure China's economy, believes that the country's statistics are largely inaccurate, as political and logistical considerations preclude accuate data collection. And according to Bao Beibei, a China analyst at Rhodium Group, a New York-based consultancy, GDP's deficiencies -- including its failure to measure environmental and social costs -- have led economists to seek alternative tools for measuring the country's economic wellbeing.

"It's increasingly controversial to use GDP as a measurement of a country's power and productivity," she said.

In any case, distinguishing between PPP and nominal GDP in comparing the Chinese and American economies will soon be moot: The Economist has projected that in nominal terms China's GDP, buoyed by still-fast annual growth, will surpass that of the United States by 2020. But even then, the United States will remain far wealthier in per capita terms: In 2013, the average American was more than five times as wealthy than his Chinese counterpart.

However politicians may spin today's IMF announcement, news that China has surpassed the U.S. in GDP is unlikely to cause much surprise in the U.S. population: a Pew Research "Global Attitudes" survey conducted in 2014 found that a majority of American citizens believed that China was already the world's largest economic power.