Here they come! China passes U.S. economy based on purchase power

The International Monetary Fund (IMF) has reported that China has overtaken the United States and is now the world's largest economy, at least based on purchasing power parity (PPP).

LOS ANGELES, CA (Catholic Online) - The IMF said that by the end of 2014, China will have 16.48% of the world's GDP based on adjusted purchasing power ($17.632 trillion) and the U.S. will only have 16.28% ($17.416 trillion).

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Purchasing power parity refers to the purchasing power of an individual based on the worth of their currency and the value of goods they can purchase. The average individual in China earns much less than the average American, but the goods to be purchased in China are also much cheaper than they are in the United States.

So based on PPP, China will overtake the U.S., but many economists thing that the IMF and the PPP measurement is incorrect or highly inaccurate.

"The U.S. remains the biggest by the more common, more widely accepted and in our view, more useful measure," said the director of global economic coordination for JPMorgan Chase and Co. in New York, David Hensley. Purchase power parity is "not quite the real thing."

Before calculating for inflation, in 2013, the United States had a GDP of $16.8 trillion, while China only had a GDP of $9.24 trillion. GDP is the more common measure of the size of an economy, and is used by the World Bank.

Hensley said that comparing PPP between countries, especially developing nations against developed nations "really exaggerate the importance of these economies." Using the PPP to measure an economy doesn't take into account the command that an individual nation has over world resources and the influence it holds over global activity.

"Emerging market economies had their day in the sun in the 2000s, and China was the epitome of those go-go days," he said.

Developing nations had a lot of help to boost their economies, and forecasts were revised to look that way. "Developed economies by comparison looked pretty stodgy," said Hensley.

"The view we encounter now is a more sobering reassessment," he said. "The U.S. has cleaned up its act. China still has a lot of work to do."

Adjusting for population, China still falls behind even with PPP data. Based on PPP GDP per capita measurements, China ranks 86th in the world, based on Bloomberg calculations using IMF data.

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