Play the Game: When Will China Surpass America?

The Economist has crafted an amusing guessing game, if you will, where you can play with economic indexes to see when will the inevitable Chinese surpassing of America's GDP pass.

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The United States has without question the most competitive economy in the world, notwithstanding the study by the World Economic Forum. No nation has even a Silicon Valley-light, let along the innovativeness and entrepreneurship of the American economy. But China has 1.3billion people to America's 308million. Even if America remains the leader in highly skilled work forces, China's GDP will eventually surpass the U.S. due to industrial output even if that output is of lower value than America's, for instance, IT and medical sectors. Only India can compete with the potential of China's economy. 1.3billion is a lot of people to fuel a massive domestic market.

So no matter what America does it seems China will surpass. In theory, we could institute limited government and get rid of taxes and become a huge Luxembourg and see where that leaves us. But it seems inevitable that due to size China will soon be #1. I have to say I loath to see that day. America is not made for second place.

The United States could at least take the necessary measures to make the U.S. economy more competitive and fuel growth so that at least were not second place by a long shot. Because at current projections America is scheduled to eventually be far behind the Chinese:

The Economist’s interactive chart allows you to make your own predictions. The relative paths of GDP in dollar terms in China and America depend not only on real growth rates but also on inflation and the yuan’s exchange rate against the dollar. Over the past decade real GDP growth averaged 10.5% a year in China and 1.7% in America; inflation averaged 3.8% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of 4.2%. Our best guess for the next decade is that annual real GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2019. But if China’s real growth rate slows to an annual average of only 5%, then (leaving the other assumptions unchanged) China would become number one in 2022. Please place your own bets.

Note: Increasing American inflation will boost GDP, but this is nominal GDP and not real GDP in the same sense, of course, that inflation means you still have a $1,000 dollars but in real value, purchasing power your value is actually a lot less. Just so nobody gets confused and thinks inflation is a good think since America's GDP will be a lot bigger if highly inflated. It is a monetary illusion which would be devastating for any economy.