China the world's largest economy

China’s GDP in 2009 is about $5 trillion whilst that of the US is $14 trillion – nearly 3 times larger. China overtook Japan to be the 2nd largest economy this year. So, when will China overtake the US to be the world’s largest economy?

The relative GDP figures of 2 countries depend not just on the growth rate. It is also impacted by things like inflation and currency exchange rate. China, which traditionally has a higher inflation rate, will get a boost on its GDP from inflation. Similarly, a strengthening Yuan will help bolster its value of goods and services produced.

In the last decade, the real GDP growth averaged 10.5% for China and 1.7% in America; inflation averaged 3.8% and 2.2% respectively. Since 2005, the Yuan has appreciated an average of 4.2% annually.

Extrapolating from the past, conservatively, we assume an average growth rate over the next decade of 7.5% for China and 2.5% for the US, inflation rate of 4% and 1.5% respectively and the Yuan gaining 3% per year, China should pass the US as the biggest economy in the world by 2020. If, however, China’s growth falters to 5%, then the overtaking date would be 2022 – a mere 2 years later.

So, it is no more a question of whether China will overtake the US as the world’s biggest economy. Rather, it is a matter of when only.