16 October 2020   2 comments

Graham Allison has written an essay for The National Interest on the recent news that China has displaced the US as the largest economy in the world. The news should not be especially surprising given that the population of China is 4 times larger than the US and also given that China has historically been a dominant power, despite its travails in the 20th Century. The change from the 2nd to the 1st largest economy was based on a shift from measuring the economy in terms of market exchange rates (simply measuring yuans to dollars) to purchasing power parity (actually measuring what a yuan and a dollar actually buys). Allison describes the difference:

“In sum, while the yardstick most Americans are accustomed to still shows that the Chinese economy is one-third smaller than the U.S., when one recognizes the fact that $1 buys nearly twice as much in China than in the U.S., the Chinese economy today is one-sixth larger than the U.S. economy.”

The COVID-19 pandemic will only amplify the differences between the two economies. The Economist explains:

“The variation is the result of differences between countries. Most important is the spread of the disease. China has all but stopped it while Europe, and perhaps soon America, is battling a costly second wave. Over the past week Paris has closed its bars and Madrid has gone into partial lockdown. In China, meanwhile, you can now down sambuca shots in nightclubs. Another difference is the pre-existing structure of economies. It is far easier to operate factories under social distancing than it is to run service-sector businesses that rely on face-to-face contact. Manufacturing makes up a bigger share of the economy in China than in any other big country. A third factor is the policy response. This is partly about size: America has injected more stimulus than Europe, including spending worth 12% of GDP and a 1.5 percentage point cut in short-term interest rates. But policy also includes how governments respond to the structural changes and creative destruction the pandemic is causing.”

There is not much significance to this change. It would be hard for the US, with only 4% of the world’s population, to retain the spot of the world’s largest economy. Moreover, one should keep in mind that the Chinese have many people to satisfy economically–not an easy task with climate change altering the patterns of viable economic activity. But the important lesson of the pandemic is that globalization is not a seamless process and figuring out how to satisfy economic interests which require a high degree of interdependence with political interests which seem to be tilting in favor of narrow national interests will be a very difficult task.

Posted October 16, 2020 by vferraro1971 in World Politics

2 responses to “16 October 2020

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  1. Is it OK to share your news with other family members, classmates, or friends? I truly appreciate all you are doing to keep us information. Priscilla Morse Huston MHC’64



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