Is China, the Largest Economy of the World’s And Why?

For the third year in a row, China was the world’s largest economy in 2019. It contributed $22.5 trillion, or 17.3%, of the world’s $130 trillion in gross domestic product (GDP), according to estimates by the World Bank. It uses so-called international dollars to make better comparisons among countries.1>>>CONTINUE READING HERE

The U.S. was second, with $20.5 trillion, or a 15.8% share. The European Union was in third place, contributing $19.9 trillion, or 15.3%, of world GDP. The three combined represented 48% of the world economy.1

No other economy is even close to the top three. The fourth-largest in 2019 was India, generating $9.2 trillion, and Japan was fifth at $5.2 trillion. Germany, the largest economy in the EU, added $4.5 trillion.1

China has been the world’s largest economy since 2017, when it took the top spot from the EU. Still, China’s growth rate has slowed to single digits as its leaders attempt to head off an asset bubble through reform. So, it’s unlikely that the Chinese yuan will replace the dollar as the world’s reserve currency anytime soon. The dollar is buoyed by the power of the U.S. economy.

GDP has four components: consumer spending, government, business investment, and net exports (exports minus imports).2

PPP takes into account the cost of living by reflecting how much the currency of one country needs to be converted to another to ensure that the first currency can buy the same amount of goods and services as the second country.3 It’s the reason The Economist‘s Big Mac Index shows what a Big Mac costs in 55 countries and the euro area.4

Should the EU Be Counted as an Economy?

Even though the EU produces more, some experts say the U.S. is still a larger economy. They argue that the U.S. is a country while the EU is just a trading area that includes 27 separate member countries.

But the EU confers many rights that make it more than just a free trade zone like the United States–Mexico–Canada Agreement. In addition to tariff relief, the EU allows free movement among the countries for employment and commerce.5 Furthermore, 19 of these countries also share a common currency, the euro.

Despite the eurozone debt crisis, the EU is lurching toward greater fiscal integration as well as a monetary one. The EU is acting more and more like a unified economy all the time. Furthermore, the EU’s currency, the euro, has successfully competed with the dollar as a global currency.

Rankings by Nominal GDP

Here are the 2019 rankings by nominal GDP, shown in current U.S. dollars. These don’t take into account PPP, and by this measure, the U.S. is the world’s biggest economy:6

1. U.S.: $21.4 trillion
2. EU: $15.6 trillion
3. China: $14.3 trillion
4. Japan: $5.1 trillion
5. Germany: $3.8 trillion
6. India: $2.9 trillion
7. U.K.: $2.8 trillion
8. France: $2.7 trillion
9. Italy: $2.0 trillion
10. Brazil: $1.8 trillion

Instead of PPP, these calculations use the official exchange rate. Unlike PPP, the official exchange rate doesn’t account for changes in the rate over time. It also doesn’t compensate for government manipulation of exchange rates. PPP takes these variances into account, giving a more realistic picture.

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