China Economic Update – 15 January 2015

In October 2014, the International Monetary Fund (IMF) announced that China had overtaken the United States to become the world’s largest economy. This was the first time since 1872 that the US was not considered the world’s largest economy, when it overtook the United Kingdom.

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Is China already the world’s largest economy, and does it even matter?

In October 2014, the International Monetary Fund (IMF) announced that China had overtaken the United States to become the world’s largest economy, when GDP is compared on a purchasing power parity basis.

This was the first time since 1872 that the United States was not considered the world’s largest economy, when it overtook the United Kingdom.

There is some uncertainty around PPP calculations, and Chinese authorities have not been keen to claim the title of the largest economy, despite increases to previous GDP estimates in December.

Whether or not it has already happened, it is inevitable that China will become the world’s largest economy – due to the scale of its population. For the majority of human history, population has been a key determinant of GDP, and China’s rapid industrialisation over the past decade has started to normalise the pattern

Does it matter though? There is only limited significance in the change in global ranking – in per capita terms, China remains a ‘middle income’ economy – with its economy less than a quarter of the size of the United States (on a PPP basis). Further reforms will be necessary to ensure that China does not remain caught in the ‘middle income trap’.

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