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
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."