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China's economy is actually in about the same place as El Salvador's, when compared in terms of per capita GDP.

China Passes Japan As World’s Second Largest Economy? Don’t Make Me Laugh

The GDP is a measure of an economy’s total output, the market value of all of its goods and services. Recently the media reported that China has surpassed Japan in terms of GDP. What this means is that the Chinese economy produced goods and services valued at a few hundred billion more than the Japanese economy did. But what does this really mean? Is China actually richer than Japan? Are the Chinese coming?

A better measure of the wealth of a nation is the per capita GDP. In terms of its per capita GDP, China ($6,600) is poorer than Poland ($14,000) and nowhere near Japan ($33,000). In fact, China is in about the same place as El Salvador, when its economy is considered in the light of per capita GDP.

Clearly, something isn’t quite right with the notion that China has surpassed Japan as the world’s second largest economy. You see, numbers can be deceiving. While China may have surpassed Japan in terms of growth of its total economic output, it has not exceeded El Salvador in terms of the purchasing power of its consumer. It is the purchasing power of the consumer that really matters, however. Thus, to actually equal or exceed Japan’s economy, China’s GDP would have to be today at least $100 trillion. It won’t be that until 2020 or 2050, depending on projected economic growth and assuming that the per capita GDP manages to keep up. It is entirely plausible to assume that China might reach the $100 trillion GDP mark in 2020 while having per capita GDP of a poor nation, if its consumers continue to remain poor.

Output and growth are nice, but unless that growth translates into a commensurate change in standard of living and a growth of the purchasing power of the consumer, it means very little. In fact, such growth without commensurate income increases is a recipe for political instability. Today, the Chinese consumer isn’t much of a force in the global economy, which is why China’s economic fortunes are directly tied in to its export markets. But to actually grow in real terms, the Chinese economic growth will have to translate in the growth of wealth of the average Chinese consumer. When and if that will happen is an open question. It is not open to question, however, that the Japanese consumer can outspend the average Chinese.

The fact is that China’s stellar growth has been largely a function of smoke and mirrors. Ballooning trade surpluses, currency undervaluation, and emphasis on GDP growth—while all this seems impressive to a casual observer, it belies the fact that the Chinese consumer has not become wealthier than the consumer in Japan. 

About A. Jurek

A. Jurek is one of the editors at Blogcritics. Contact me at: [email protected]

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