Chinese economy ahead of US in terms of purchasing power as per IMF data: report
20 October 2020
China has overtaken the United States as the world’s largest economy amidst the debilitating pandemic that brought global economic activity to a standstill, data provided by the International Monetary Fund (IMF) showed.
The United States suffered the worst losses in terms of human lives, medical spending and government spending on relief and stimulus measures while China restarted its economy early on after the initial slowdown caused by the Wuhan virus infections.
Reports citing the IMF’s World Economic Outlook 2020 released recently, China has now overtaken the US in terms of purchasing power parity (PPP), reports point out.
In PPP terms China’s economy is at $24.2 trillion compared to the American economy that is worth $20.8 trillion.
The PPP is used to compare the money values of different currencies in terms of how much a particular currency can buy in different countries. This is based on the market exchange rates, which, however, does not reflect the real figures. This is especially so considering allegations that the Chinese yuan is grossly undervalued against the US dollar
With PPP adjustment, IMF estimates China’s economic output overtaking that of the US by a huge margin.
According to IMF, the PPP “eliminates differences in price levels between economies” and thus compares national economies in terms of how much each nation can buy with its own currency at the prices items sell for there.
As per IMF estimates, “the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate (MER GDP) substantially understates the actual level of China’s output vis-a-vis the rest of the world; in China’s situation, GDP at purchasing power parity provides the best measure for comparing output across countries.”
Using the The Economist’s new method called the The Big Mac Index to determine whether the currencies were at a correct level, it was found that one US dollar can buy nearly twice as much in China than in America itself, and the current market exchange rates hardly acknowledge that.
According to The Economist, “In 2019 China’s workers produced over 99 trillion yuan worth of goods and services. America’s produced $21.4 trillion-worth. Since 6.9 yuan bought a dollar last year, on average, China’s GDP was worth only $14trn when converted into dollars at market rates. That was still well short of America’s.
“But 6.9 yuan stretches further in China than a dollar goes in America. One example is McDonald’s Big Mac. It costs about 21.70 yuan in China and $5.71 in America, according to prices collected by The Economist.
By that measure, 3.8 yuan buys as much as a dollar. But if that is the case, then 99 trn yuan can buy as much as $26trn, and China’s economy is already considerably bigger than America’s,” The Economist adds.
China’s economy has been growing at around 10 per cent for almost the last 30 years. The country has witnessed startling growth in every sector, with the manufacturing sector being the engine of overall resurgence, says the report.