September 04, 2015
Most of the reporting on China and its current economic problems refers to it as the world’s second largest economy. This is true if its GDP is measured on a currency conversion basis, in other words taking its GDP and effectively converting it into dollars at the official exchange rate.
However economists more typically use purchasing power parity measures of GDP. These involve using a common set of prices for goods and services in all countries. By this measure China’s GDP is already more than 5 percent larger than the GDP of the United States, not counting Hong Kong.
This point is important in understanding China’s impact on the world economy. If its economy slows significantly, the reduction in its imports of oil and other inputs will reflect its size based on its purchasing power parity GDP, not the exchange rate measure. This is why the recent uncertainty in China is having so much impact on the price of oil and other commodities. The reporting should acknowledge this fact.