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When Will China Be Larger Than The U.S. Economy?

 January 07, 2010 09:14 PM

I got this question twice this week, once from an interest reader and once after a speech.  I expect China's economy to be larger than ours within the next decade, most likely around 2018.  Here's a picture of the two economies:

China Data notes: These are low-fidelity data.  The U.S. GDP figures are decent, projected out at our historic average growth rate.  Actual data end in 2008, so the 2009 low figures are not incorporated.  Chinese GDP data are of low quality, but roughly indicative of the trend.  They were also projected out using the historic growth rate.  Converting the Chinese data into figures comparable to U.S. dollars is tough.  This conversion was done with an estimate of purchasing power parity, but consider it only a w.a.g.

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At some point China's economic growth rate will slow down, but only after their per capita production rises to that of advanced economies.  That's still quite some ways away.  The the strong China economy in 2020 will continue reflect low per capita income, but lots of capitas.

But what's it mean for the United States?  Some folks like to swagger and say "We're Number One," and they wont' be able to say that in a decade.  However, economics is not like a game, in which there's a winner and a loser.  We can all be winners.  In fact, engage in the following thought experiment.  Would you be better off

  • making $40,000 a year in a neighborhood where everyone else makes $30,000, or
  • making $50,000 a year in a neighborhood where everyone else makes $60,000?

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If you are focused on envy and keeping up with the Jones, the first choice is for you.

If, instead, you are focused on income as a means of enjoying life, then you prefer the second choice.  If you care about your fellow man, you prefer the second choice.  If you think that social problems spill over from low-income households to their neighbors, then you prefer the second choice.

I certainly would rather live in a rich neighborhood, even if I cannot keep up with the Joneses.  (Right now my neighbors wonder how I keep such old cars running, while they buy new BMWs and Mercedes, so I'm comfortable not being Number One.

Back to reality.  A richer China will increase demand for American-made goods and services.  Right now China is the third largest buyer of American exports (after Canada and Mexico).  We export all sorts of stuff to China: consumer goods, capital goods, food, industrial commodities.  Detail here.

Business planning idea:  China will increasingly be a market, not just a production location.

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