China’s economy is probably not as big as you think it is. Gabriella Beaumont-Smith writes:
The purchasing power parity exchange rates are an extremely useful way to measure development and predict where a country might aim its GDP to achieve the same living standards as the United States. But to actually compare the sizes of the economies, it is better to use the regular market exchange rates, like you would to change your dollars to another currency.
On this measure, the GDP of China was actually about $14 trillion, not $21 trillion, in 2017. That’s still a huge number, but it’s not as big as the United States, which had a GDP of $19.5 trillion that year.
In practical terms, this means China doesn’t have as great a capacity to spend as is being advertised.
This is especially important to understand when talking about trade.
GDP is an indicator of a country’s economic footprint on the world stage. So, it’s important to understand the extent to which its economic size could disrupt global markets.
When countries trade with one another, they also use market exchange rates to convert to the currencies that they need. For example, when the United States imports from China, China must accept U.S. dollars based on the market exchange rate that you see at your bank.
Similarly for exporters, when the U.S. exports to China, the U.S. has to accept yuan at the market exchange rate.
The inappropriate use of purchasing power parity exchange rates to measure economic capacity has fueled the misconception that China is a giant that threatens the U.S. for economic dominance. This in turn has fueled support for tariffs, which only harm our economy by raising prices for imported goods and raw materials.
[Gabriella Beaumont-Smith, “China’s Economy Isn’t What It’s Cracked Up to Be,” The Daily Signal, October 10]
