China surpasses U.S. to become largest world economy

Nov. 9, 2014 - FILE photo of woman walking past a shop in Huairou district where the g Asia-Pacific Economic Cooperation (APEC) summit met in Beijing, China. For the first time in decades, the U.S. is no longer the largest economy in the world, and China has become number one. (AP)

For the first time in decades, the U.S. is no longer the largest economy in the world, and China has become number one, the International Monetary Fund says.

The IMF recently released the latest numbers for the world economy, stating that China will produce $17.6 trillion in terms of goods and services--  compared with $17.4 trillion for the U.S.

Just 14 years ago, the U.S. produced nearly three times as much as the Chinese, Dow Jones’ MarketWatch reported.

But each country reports its data in its own currency, according to the IMF website. In order to compare data, each country's statistics must be converted into a common currency. But there are several ways to manage that conversion and each can result in very different answers.

Another measure of an economy’s strength is its “purchasing power parity” or PPP—the rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country.

China now accounts for 16.5% of the global economy when measured in real PPP terms, compared with 16.3% for the U.S.

Prices aren't the same in each country, Business Insider suggests. The same shirt will cost you less in Shanghai than in San Francisco, so comparing countries without taking these factors into account is not always reliable.

Though the average Chinese citizen earns a lot less than the average American, simply converting a Chinese salary into dollars underestimates how much purchasing power that person, and therefore that country, might have.

So the IMF measures both GDP in market-exchange terms, and PPP terms. On the purchasing-power basis, China is overtaking the U.S. right now and becoming the world's biggest economy.

MarketWatch columnist Brett Arends suggests that if you just look at international exchange rates, the U.S economy is still larger than China’s allegedly by almost 70 percent. But, Arends adds, although these measures are commonly cited, they can also be unreliable.

Experts have predicted China’s economy would surpass America’s for years and recent conventional wisdom anticipated the change this year.

China’s economy may now be the world’s largest, but it’s still not the richest. GDP per head is still less than a quarter of U.S. levels, the Financial Times reported.