New data from a statistical program run by the World Bank suggests that China's economy is much bigger than previously thought, and may soon surpass that of the United States, CNNMoney reported.

 

The data, published by the International Comparison Program, relies on a method of calculating the real cost of living to compare economies around the world while accounting for changes in exchange rates. That measure is called purchasing power parity.

 

By that measure, China's economy was 87 percent the size of the U.S. economy in 2011 and is on track to claim the top ranking soon.

 

However, if you just compare gross domestic product, the U.S. economy is around twice the size of China's.

 

This article in The Wall Street Journal does a good job of explaining purchasing power parity, and also describing its limitations.

 

"PPP is useful as a way to get at hidden advantages developing nations have," the article states. "For instance, it costs the Chinese government much less to pay its soldiers than it does the U.S. government to pay GIs."

 

But, "China can't buy missiles and ships and iPhones and German cars in PPP currency. They have to pay at prevailing exchange rates. That's why exchange rate valuations are seen as more important when comparing the power of nations."