HONG KONG — There was much fanfare last month when Beijing reported that China had overtaken Japan to become the second biggest economy in the world. But this celebration was bogus — because the reality is that in real terms China has already become the biggest economy in the world, edging slightly past the United States.
The answer to how this can be true, only second last month and now the biggest in the world, is that the measurements are different. In market prices, China's gross domestic product (GDP) is $5.88 trillion, far behind the $14.6 trillion of the U.S. But in terms of output volume, China is worth $14.8 trillion, more than the U.S.' $14.6 trillion.
More and more international bodies, such as the International Monetary Fund (IMF), World Bank and Organization for Economic Cooperation and Development, recognize the limitations of market exchange rates in assessing economic strength across international borders. You only have to look at the controversy over whether China's renminbi is manipulated, messaged or otherwise undervalued to appreciate this. The CIA World Factbook comments that, "Because China's exchange rate is determined by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output."
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