How Do You Measure the Wealth of Nations?

In a piece at the Wall Street Journal Stella Yifan Xie explains why the size of China’s economy may not exceed that of the United States:

HONG KONG—The sharp slowdown in China’s growth in the past year is prompting many experts to reconsider when China will surpass the U.S. as the world’s largest economy—or even if it ever will.

Until recently, many economists assumed China’s gross domestic product measured in U.S. dollars would surpass that of the U.S. by the end of the decade, capping what many consider to be the most extraordinary economic ascent ever.

But the outlook for China’s economy has darkened this year, as Beijing-led policies—including its zero tolerance for Covid-19 and efforts to rein in real-estate speculation—have sapped growth. As economists pare back their forecasts for 2022, they have become more worried about China’s longer term prospects, with unfavorable demographics and high debt levels potentially weighing on any rebound.

Some say that China’s economy is already larger than that of the United States, relying on “purchasing power parity”. Based on purchasing power parity assessments of their economies, for example, the World Bank counts the Chinese GDP as $27 trillion while that of the U. S. is $23 trillion.

IMO that’s a misuse of purchasing power parity and that is particularly true in the case of China. “Purchasing power parity” is a method of comparing currencies by comparing the a “basket of goods” in the countries. It’s a method of comparing economic productivity and standard of living. How do you do that in the case of China that is quite opaque and does not have a exchangeable currency?

Furthermore, when you use PPP as intended, the figure to consider is the purchasing power parity per capita. Turning to the World Bank again, China’s per capita PPP is about a third that of the United States.