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1 [1] (January 29, 2015)

handle is hein.crs/crsuntaajuq0001 and id is 1 raw text is: M Congressional Research Service infori the Wgislative debate since 1914 China as the World's Largest Economy~ S January 29, 2015 Various media have recently reported that China has overtaken the United States to become the world's largest economy (a position the United States had held at least since 1913), based on estimates of purchasing power parity (PPP) measurements and projections made by the International Monetary Fund (IMF). What do these data mean? How should they be interpreted? And what implications, if any, do they have for the United States? What Are PPPs and Why Are They Used? The IMF's World Economic Outlook (WEO) provides comparative economic data and makes economic projections for numerous countries several times a year. These include country measurements of gross domestic product (GDP) converted into U.S. dollars using nominal exchange rates. The October 2014 WEO database estimated U.S. and Chinese nominal GDP for 2013 at $16.8 billion and $9.5 billion, making them the number one and number two largest economies, respectively. The IMF further projected that 2014 nominal GDP for each at $17.4 trillion and $10.4 trillion, respectively. These data would indicate that U.S. GDP is much larger than China's (76.8% higher in 2013). However, many economists contend that using nominal exchange rates to convert foreign currency into U.S. dollars for comparing GDP can be misleading. First, China pegs its currency (the renminbi or RMB) largely to the U.S. dollar and has intervened in currency markets to limit its appreciation, leading some observers to charge that the RMB is undervalued against the dollar, which in turn would affect estimates of China's GDP. Second, nominal exchange rates simply reflect the prices of foreign currencies vis-h-vis the U.S. dollar and such measurements do not take into account differences in the prices for goods and services across countries. To illustrate, one U.S. dollar exchanged for RMB in China would buy more goods and services there than it would in the United States. This is because prices for goods and services in China are generally much lower than they are in the United States. To factor in these differences, many economists attempt to calculate a PPP exchange rate, based on price surveys that are conducted across countries, to reflect the actual purchasing power of each currency relative to the dollar in real terms. Thus, for example, if China produced one ton of steel, the PPP exchange rate would attempt to reflect the value of that steel in the United States. Although the PPP data have numerous shortcomings and do not reflect quality of life measures (such as clean air, political freedom, health and safety, leisure time, etc.), they are considered by many economists to be a more accurate method to make international comparisons of certain GDP data than the use of nominal exchange rates. How does the PPP Exchange Rate Calculation Affect the Estimated Size of China's Economy? The IMF's PPP data are based on price surveys conducted globally by the World Bank, the most current of which was done for 2011. The sharp differential in prices between China and the United States resulted in an estimate of China's 2011 PPP exchange rate with the dollar that was 84.3% greater than the nominal exchange rate, which in turn, raised the estimated value of China's GDP in PPP terms by the same level. The IMF's PPP data raise China's 2013 GDP to $16.1 trillion (95.3% of the U.S. level) and the projected 2014 level to $17.6 trillion, which exceeds that of the projected 2014 U.S. level by 1.1%. The IMF further projected that China's 2019 GDP on a PPP basis would be 21.7% greater than the U.S. level. Figure I. Estimates of U.S. and Chinese GDP on a PPP Basis: 1980-2013 and Projections through 2019 ($ in billions) 30,000 25,000-A 20,000 15,000 - 10,000 5,000 0 -U.S. -China Source: International Monetary Fund. Factoring in Per Capita GDP China's emergence as the world's largest economy in PPP terms should be put into perspective, especially given that China's population is nearly 4.3 times greater than that of the United States. China's GDP on a per capita on a PPP basis, a common measurement for comparing international living standards, is considerably smaller than the U.S. level. The IMF estimates China's 2014 per capita GDP on a PPP basis at $12,893, equivalent to 24% of the U.S. level ($54,678). Even with a rapidly growing GDP, Chinese living standards are not likely to approach U.S. levels for several decades. The Economist Intelligence Unit projects that by 2030, China's per capita GDP on a PPP basis will amount to only 39% of U.S. levels. www crs.gov 1 7-5700

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