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Move over America: China overtakes US as world's biggest economy (kind of) Move over America: China overtakes US as world's biggest economy (kind of)
(about 4 hours later)
China has become the world's biggest economy, overtaking the mighty USA, which has been the world's economic superpower for more than a century. But there's a catch: China has finally overtaken the USA as the world's biggest economy - at least when the figures are adjusted for Purchasing Power Parity.
Is this the end of the Pax Americana? According to the International Monetary Fund the combined purchasing power of China's citizens now outstrips that of America's. And by the end of the year will China should make up 16.48 per cent of the world's purchasing-power adjusted GDP for a total of $17.632 trillion (£11 trillion).
If you believe the International Monetary Fund it is. The long awaited day has arrived. The economy of the Middle Kingdom is now bigger than that of Uncle Sam. At least by Purchasing Power Parity.  The US, by contrast, will make up 16.28 per cent, or $17.416 trillion.
Hang on a minute, what’s Purchasing Power Parity? Purchasing power parity seeks to address the fact that while wages tend to be lower in “developing” countries than in mature economies like the US, the price of goods and servicing is also typically much lower.
Good question. Purchasing Power Parity looks at a country’s gross domestic product (GDP) based  on the comparative spending power of the individuals within it combined. It’s an attractive measure because it adjusts for the fact that while wages in supposedly less developed countries tend to be lower than in mature economies, the price of goods and services are often also considerably cheaper.  The Economist's Big Mac Index, for example, quotes the price of the McDonalds staple in July at $4.80 in the US, but just $2.73 in China.
Is this something to do with the Big Mac Index? PPP, therefore, bases economic output on what a country's citizens can purchase, as opposed to an unadjusted GDP figure using market exchange rate, which is more often quoted.
That’s not a bad way of looking it. A Big Mac, for example, will cost you a lot less in Beijing than it will in Boston. PPP adjusts for that fact. Of course, in calculating it you have to consider a lot more than just a Big Mac. To make it work you have to look at a vast range of goods and services. And that’s where the problems start. However, the figure is controversial. It requires the comparison of a huge amount of goods and services, and is therefore a vast statistical undertaking that can only be conducted infrequently with estimates used during intervening periods. The methods used to collect the data have also led to controversy in the past.
Why so?  When it comes the raw GDP data base on exchange rates, China will eventually also overtake the US if it carries on growing as it has, but that is still likely to take many years. 
Well there have been numerous controversies over the methodology used for calculating PPP. These have kept legions of pointy heads in well paid work for years. Putting it together is also a huge statistical undertaking that can only be done relatively infrequently. In the interim, economists have to rely on estimates. 
Oh. So what does it all mean?
Put it this way, regardless of the debates about statistics even if China isn’t ahead now (and it probably is), it will be soon. Although it will still take several years for it to outpace the US by conventional measures of GDP.