Making the Chinese dream a reality

The world looks like a very different place if other economies are compared based on the statistical method being used to proclaim that China's GDP will surpass that of the United States this year.

If going by this method, called Purchasing Power Parity, India would already be the world's third-richest nation, having overtaken Germany in 2003 and Japan in 2008.

The Indonesian economy would be larger than that of the United Kingdom, and the Philippine economy would be bigger than Switzerland's.

China's GDP is projected to increase to $17.6 trillion this year, if calculated at PPP, whereas the GDP of the US is expected to grow to $17.4 billion, according to the International Monetary Fund. In reality, China has not yet overtaken the US as the world's largest economy.

There are two main methods for comparing economies. One method relies on market exchange rates - that is, the rates in the foreign exchange market.

The other method relies on the PPP exchange rate - that is, the rate at which the currency of a country would have to be converted for a purchase in another country. Goods and services tend to be cheaper in low-income countries than in high-income ones. A haircut is cheaper in Shanghai, for example, than in New York.

In advanced economies, the difference between market rate and exchange rate measurements is significant, but not huge. In emerging economies, it is typically both significant and huge.

Based on market rates, the Chinese economy remains 55-60 percent relative to the GDP of the US. So China will overtake the US in these terms, but by the 2020s. Not yet.

Going back to our comparisons of other countries, if you rely on GDP comparisons based on market exchange rates, India is the 10th-largest economy. By the same token, the Indonesian economy is about one-third of the UK economy, whereas the Swiss economy is 2.5 times bigger than that of the Philippines.

Also, huge gaps remain between the living standards in the advanced and emerging economies. Measured by per capita GDP (PPP), living standards in the UK are nearly four times higher relative to Indonesia, while living standards in Switzerland are more than eight times higher than those in the Philippines.

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