AMERICA'S ECONOMY did not exceed China in size until the 1880s, according to the Maddison Project at the University of Groningen. The two now rival each other again. Because China’s workers are 4.7 times as numerous as America’s, they need be only a fraction as productive to surpass America’s output. No fewer than 53 countries would already have a bigger GDP than America if they were as populous as China.
In 2019 China’s workers produced over 99trn yuan-worth of goods and services. America’s produced $21.4trn-worth. Since 6.9 yuan bought a dollar last year, on average, China’s GDP was worth only $14trn when converted into dollars at market rates. That was still well short of America’s.
But 6.9 yuan stretches further in China than a dollar goes in America. One example is the McDonald’s Big Mac. It costs about 21.70 yuan in China and $5.71 in America, according to prices collected by The Economist. By that measure, 3.8 yuan buys as much as a dollar. But if that is the case, then 99trn yuan can buy as much as $26trn, and China’s economy is already considerably bigger than America’s.
Motivated by this logic, The Economist has compared the price of Big Macs around the world since 1986. The result is a rough gauge of the purchasing power of currencies. It suggests that many currencies are undervalued, relative to the dollar, on the foreign-exchange markets (see chart). A few, such as the Swiss franc, are overvalued. Lebanon’s pound was undervalued until inflation took off late last year, raising local prices even as the pound remained pegged to the dollar. The Big Mac alone jumped 38% in price.
Every few years the World Bank embarks on a vastly more systematic effort to gauge purchasing power by comparing thousands of prices across the world. The results can be startling. Its survey of prices in 2011, released six years ago, showed that China was cheaper than previously thought and its economy was therefore much larger. Based on these estimates, the IMF calculated that its GDP overtook America’s in 2014 and was 27% bigger in 2019.
Many observers, however, greeted these estimates with scepticism. In 2010 an informal survey by a reporter at Caixin, a financial magazine, noted that a number of items were dearer in Hangzhou than in its sister city Boston. (It compared apples to apples, and found that the Golden Delicious variety was 37% pricier in the Chinese city.)
The sceptics won some vindication in May when the World Bank released its latest price-comparison exercise. It discovered that things were about 17% more expensive in China, relative to America, than previously thought. At a stroke, China’s GDP fell by over $3.2trn. The estimates suggest China did not overtake America’s economy until 2016.
But are these new estimates any more robust than earlier efforts? Comparing prices across the world is fraught with difficulties. An item may be a staple in one place and a delicacy in another. The World Bank must also decide how much weight to give each item. That depends on shopping habits, which differ—partly because prices differ. It is easy to go around in circles.
So it might help to check the World Bank’s results against a cruder yardstick—like the price of a Big Mac. Our index suggests that the bank now, if anything, underestimates the buying power of China’s currency, and therefore its economic size. McDonald’s was once a symbol of America’s economic might. Now the Big Mac shows how its might is being surpassed.
Explore the full version of our Big Mac index with our interactive here.
As an expert in economics and global market trends, I bring a wealth of knowledge to the analysis of the article published on July 15th, 2020, by The Economist, regarding the comparison of the economic sizes of the United States and China. My expertise stems from years of researching and analyzing economic data, as well as staying abreast of developments in the field.
The article primarily discusses the size of the economies of the United States and China, delving into the intricacies of currency valuation, purchasing power, and GDP comparisons. It draws attention to the Maddison Project's data at the University of Groningen, highlighting the historical context of when America's economy surpassed China's in the 1880s and the current rivalry between the two economic giants.
One key point emphasized is the significant difference in population sizes between the two countries, with China's workforce being 4.7 times larger than that of the United States. This demographic factor is highlighted as a major influence on China's ability to surpass the U.S. in economic output, as Chinese workers can be less productive individually while still contributing to a larger overall GDP.
The article introduces the concept of purchasing power by using the price of a McDonald's Big Mac as a benchmark. It discusses how the exchange rate and the cost of goods, such as the Big Mac, can impact the relative value of currencies. The purchasing power parity (PPP) theory is applied to suggest that many currencies are undervalued compared to the U.S. dollar, using the Big Mac prices as a rough gauge.
Furthermore, the article references the World Bank's periodic efforts to systematically gauge purchasing power by comparing prices worldwide. It highlights the challenges and subjectivity involved in such comparisons, including variations in the perceived value of items across different regions and the difficulty in assigning appropriate weights to different goods.
The skepticism surrounding the World Bank's estimates is discussed, particularly in relation to a 17% increase in the perceived cost of living in China compared to the United States. The article questions the robustness of these estimates and suggests that a simpler indicator like the Big Mac index may provide a more accessible and potentially more accurate measure of purchasing power.
In conclusion, the article makes a compelling case for the use of a cruder yet practical yardstick, such as the price of a Big Mac, to gauge the economic size and purchasing power of countries. It challenges traditional measures and opens a discussion on the complexities of comparing global economies.
