Written By Basilio Chen

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The International Monetary Fund has indicated today that China, and not the US, is now the biggest economy in the world.

The IMF uses the PPP estimates which many economists consider a fairest measure because it takes into account the cost of living in different countries.

Based on these estimates, the US economy considering its population purchasing power is measured to be $17.4 trillion while China is $17.6 trillion.

However what is more important to consider is that while the US growth has reduced considerably to 2% in 2014 with an continuous declining growth rate for the last 10 years, China has maintained over 7% growth rate which although reduced after the global financial slowdown remains much higher plus the fact that China population is many times bigger that of the US.

China Climb to #1

The growth in China started 30 years ago and steadily overtook the US economy while at the same time the US economic growth slowed.

The latest IMF figures show the Chinese economy is worth $17.61 trillion, compared with $17.4 trillion for the US

 

China has 1.3 billion people which is about 5 times than the US.  In the 19th century, the US with an increase immigration of 30 million europeans also increased its economy surpassing the UK which at the time was the #1 economy.  China with its population density

China has a population of around 1.3 billion – four times that of the US – but its economy has only just become the biggest

 

The new IMF rating is based on an analysis using a statistic called ‘purchasing power parity’ (PPP), which makes adjustments for the fact that goods are cheaper in China and other countries relative to the US.

Without these cost adjustments factored in, the Chinese economy is still smaller than that of the U.S., at $10.3 trillion.

But experts have described the toppling of America after nearly 150 years by China, even on the PPP measure, as a ‘symbolic’ moment for the global economy.

China enjoyed three decades of double-digit growth before the global downturn of 2009, as industrialization and sweeping economic reforms in China created a new powerhouse in the East. Growth has now slowed (since 2012) but remains strong by Western standards with the IMF forecasting expansion of 7.4 per cent this year and 7.1 per cent in 2015.

And while for the US, the IMF is predicting growth of just 2.2 per cent this year and 3.1 per cent next year.

US overtook the UK 142 years ago

Britain led the world in the industrial revolution of the mid-18th century, but America was hot on its heels.

The US underwent huge industrial expansion after its civil war ended in 1865, fueled by rapid urbanization and huge population growth – including the immigration of nearly 30 million Europeans.

Britain had out-produced the U.S. and its European rivals for much of the 19th century, at the height of the industrial revolution and with trade links across the Empire. But the US caught up as a growing population, the expansion of the railways and a focus on industry as well as agriculture boosted its economy.

In 1872, the US overtook Britain to become the world’s largest, a position it held for the next 142 years.

Productivity, leading brands and innovation, coupled with the success of the US dollar and the fact that 62 per cent of the world’s financial reserves are held in the currency, kept America on top.

Meanwhile, the economies of Britain and other European powers were ravaged by two world wars. Britain borrowed heavily from America during the Second World War and received a further $4.3 billion in 1945.

History Repeats

China was the world’s leading trading nation up to the 18th century, until control of its ports and trade were taken over by imperial nations in Europe. Under Communism it remained inward-looking, until 1980 when the government started to allow foreign investment.

In this graph depicting the top contributors to the global economy, it shows China and India combined to be more than 50% of the world’s economy up until the 1800’s, a situation that did not change until the 1980’s.  Now China and India together add up to over 40% of the world economy based on IMF estimates.

 

Based on the IMF estimates, India is ranked as the #3 economy in the world and Japan is #4 and Germany #5.

Russia, Brazil, France, Indonesia and the UK make up the rest of the top 10 in that order.

Many economists believe the PPP measure of an economy is a fairest measure because it takes into account the cost of living in different countries.

As an example, although wages are typically far lower in less developed countries than in mature economies, goods and services are often also cheaper, which affects individual consumers’ comparative purchasing power.