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2010-12-29

When will China be the largest economy?

Comments on the Economist's question and its projection on when China will take over the US as the largest economy. See http://www.economist.com/blogs/dailychart/2010/12/save_date

It seems reasonable that China will take over the US as the largest economy by 2020.

While the assumption about growth rate, inflation and exchange rate changes can be made to project different scenarios, it may be easier to use the purchasing power parity (PPP) as the base of projection and that would involve fewer assumptions and leave the inflation and change rate changes out of the equation.

That would certainly make the projection more focused on the real side, as opposed to nominal side that can swing dramatically from time to time.

Based on CIA world factbook data, China's GDP was $8.8 trillion and the US $14 trillion in 2009, indicating that the US' was 1.591 times of China's economy in real terms in that year.

Assuming the difference in their growth rates is 5% a year in real terms, it would take 9.5 years for China to catch up with US, i.e. 2018-19.

You can vary the assumption on the difference in growth rate and derive a range.

By doing that, the likely scenario is that between 2016 to 2022, China will become the largest economy.
 
PS: The Economist projection is:
Over the past decade real GDP growth averaged 10.5% a year in China and 1.7% in America; inflation averaged 3.8% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of 4.2%. Our best guess for the next decade is that annual real GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2019. But if China’s real growth rate slows to an annual average of only 5%, then (leaving the other assumptions unchanged) China would become number one in 2022.

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