Did China’s economy overtake the U.S. in 2010?

Just in time for Hu Jintao’s visit to Washington next week, economist Arvind Subramanian of the Peterson Institute for International Economics is coming out with a new set of GDP estimates showing that the Chinese economy may have actually surpassed the United States some time in 2010.

Subramanian’s estimates rely on purchasing power parity (PPP) estimates, which take differing labor costs in rich and poor countries into account. While the IMF also produces PPP estimates, Subramanian believes these are flawed, overstating price increases between 2005 and 2010 to the detriment of China. Therefore:

The latest version of the Penn World Tables (version 7 to be released in early February 2011) have corrected these biases, which result in an upward revision for China’s PPP-based GDP by about 27 percent and for India by about 13 percent for the year 2005. I use the new PWT corrections as the starting point for computing new estimates for PPP-based GDP and GDP per capita.

A second correction relates to developments between 2005 and 2010. For this period, if the IMF data are taken at face value, they suggest an increase in the real cost of living in China relative to that in the United States (which is equivalent to a real appreciation of the Chinese currency) of about 35 percent. This seems implausible because three alternative ways of assessing currency changes point to a much smaller appreciation.[…]

These two adjustments increase China’s GDP from the current estimate of $10.1 trillion to $14.8 trillion (an increase of 47 percent, of which 27 percent is due to the revision in the 2005 estimate, and the rest due to smaller-than-assumed increases in the cost of living between 2005 and 2010). This $14.8 trillion figure exceeds US GDP of $14.6 trillion. It must be emphasized, of course, that the difference is small enough to be within the margin of error.

Applying the same adjustments to GDP per capita increases the estimate for China from $7,518 (the current estimate in the IMF’s World Economic Outlook) to $11,047. The GDP per capita (the average standard of living) is now about 4.3 times greater in the US than in China compared with a multiple of 6.3 without my corrections (and compared with a multiple of 11 if GDP is computed using market exchange rates).

Subramanian argued for FP in June that by discouraging high-skilled immigration from countries like India, the United States was only taxing its own international competitiveness. These new numbers should serve as a stark reinforcement for that point. 

According to official government figures, China’s economy is still the second largest, having overtaken Japan in the second quarter of last year. 

Hat tip: Chris Blattman