Economy

China as the second world economy

EurochinaBridge: China as the second world economy

China is already the second largest economy in the world with a GDP (in current dollars) of more than $ 14 trillion. The strong growth that the Asian giant has experienced in recent decades, together with the stagnation of the euro zone (13.4 trillion), has allowed a rapid sorpasso that has de facto occurred in 2019, according to JP Morgan estimates. The US continues to be the first global economy with a GDP of 21.3 trillion dollars, a distance that is still important, but which this year will be sharply reduced due to the explosive recovery of the Chinese economy from the Covid-19 crisis.

Thus, in 2019 the US continued to be the largest economy in the world with a weight of 27.3% in world GDP. After years of rapid advance, China (17.9%) has overtaken the euro area (17.1%) to rise to second place. Japan (6.5%) ranks fourth, while India (3.7%) leads the United Kingdom (3.6%), completing the 'top 5'.

The transformation of China has been incredible. In less than 40 years, it has gone from being a predominantly agrarian country with $ 250 per capita income to being an industrial giant, exceeding $ 9,000 in income in purchasing power parity (a level similar to that of Spain in 1988). The stage of the light industry seems to be reaching its ceiling, now Beijing intends to follow in the footsteps of Japan or South Korea and become a leading economy, displacing the great western powers.

Together, these top five countries account for nearly three-quarters of all the world's production (GDP) of goods and services. The United Kingdom, Brazil, Canada, Russia and Korea complete the top 10. Analyzing the large movements in the share of global GDP, the US, China and India experienced the greatest advances in the share of global nominal GDP in 2019, albeit for different reasons. .

In the case of the United States, the dollar played a relevant role. The strength of the 'greenback' against the rest of currencies plays in favor of the US in this case, since the production or GDP of all countries is converted to dollars. A bad year for the Chinese yuan against the dollar would reduce China's advance in the share of global GDP, although the effect may also be the opposite if the yuan appreciates against the dollar. In the case of China, JP Morgan experts highlight the strong growth that the country has accumulated for years, which despite having slowed down since 2007, continues to be much higher than world growth. India, for its part, gained a share in world GDP thanks to economic growth, but also to higher inflation (sum for nominal GDP).

"The euro area continues to lose importance on the world stage. The monetary area lost 0.7% points in the weighting of world GDP in 2019, something that is partly due to the fall in the exchange rate of the euro against the dollar However, the weight of the euro zone has had a very clear downward trend since it peaked at just over 25% of global GDP in 2011. Korea, Argentina and Brazil were the next big losers from 2018 to 2019 in terms of world GDP share. However, the declines were relatively modest, "the JP Morgan report notes.

The US bank's economists explain that they update their weights with some delay because they wait for the complete and final set of data that make up the nominal GDP for the year to be published. That is why predicting what will happen this year is complicated and more so with the sudden movements that the covid-19 crisis is generating in many economies.

Nonetheless, "the impact this year will have on our 2020 weights (which will be updated sometime in 2021) is worth considering. Given the remarkable V-shaped recovery, China should see the biggest advance in the share of global We estimate that the weight of China's world GDP will rise 1.1 points - to exceed 19% in 2020. The United States is not expected to lose too much in this ranking. China's advance will probably come once again at the expense from the euro area, along with losses in the UK and India, "the report says.

China is a leader in PPA

China is a leader in PPP Another way to measure the weight of each economy in the world is through GDP in Purchasing Power Parity (PPP). The PPA allows comparison between countries, eliminating the distortions generated by the different price levels existing between them. GDP at purchasing power parity will therefore be the set of final goods and services produced in a country during a year, but instead of putting the prices of that country (and converting them directly to dollars) the prices of the United States are taken, which which serves as the calculation basis for all countries. It would be like taking all the final production of a country, for example China, and putting it at United States prices. For example, an electric car produced in China, although it has similar characteristics to another produced in the US, is usually much cheaper. With the PPP GDP, the price of that car would be equal to that of the US, increasing the Chinese GDP.

Under this indicator, the Chinese economy is the largest in the world and accounts for 22.7% of global GDP. The US economy represents 17.8% and that of the euro zone 13.2%. Emerging economies gain when it comes to analyzing GDP in PPP, adding 58% of all world production compared to 42% in developed countries. If this division is made with nominal GDP in dollars, the advanced countries account for 60% of the global economy and the rest 40%.

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