Will China Have The Biggest Economy On Earth If The Yuan Is Allowed To Increase?
Posted by China Sourcing CommentatorAug 17
Many people feel the Chinese yuan is undervalued by 40%. If the Chinese allow the yuan to increase by this amount like many in the USA want…will they then have the biggest economy on earth?
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No, the United States (for the moment) has the largest economy. China is the supply side of the curve, America is the consumer (demand) side.. It has been estimated that in as little as eight years this situation will reverse..
According to the CIA World Factbook (Link #1, below) the estimated U.S. Gross Domestic Product (GDP) in 2006 was $13.6 trillion.
According to the China chapter of the same source (Link #2, below):
• China’s estimated GDP at the official exchange rate was $2.527 trillion.
• Estimated GDP at “purchasing power parity” was $10.21 trillion.
(“One of the primary uses of purchasing power parity is in lessening the misleading effects of shifts in a national currency. This is particularly an issue when calculating a nation’s Gross Domestic Product. For example, if the riel falls in value to 80% of its value on the dollar, the GDP as expressed in US dollars will also drop to 80%. This does not accurately reflect the standard of living in that country (a common use of GDP), however, because the devaluation of the riel is most likely due to international trade issues that will not yet have had any effect on the average Cambodian. By using purchasing power parity, however, we are not misled by the temporary devaluation of the riel in relation to the dollar — a Big Mac still costs 9,000 riel in Cambodia and $3 in the US, and so our Big Mac index exchange rate remains the same.” This paragraph was excerpted from “What is PPP or Purchasing Power Parity?” at Link #3.)
You will notice that the CIA apparently adjusted the relative GDP for the U.S. and China by a much larger factor than 40%. But even their estimate does not make China’s the largest economy.
At its present rate of economic growth it remains to be seen where they will be in, say, five or ten years. If they can keep it up without serious economic trouble.