China is now pronounced: “Number 1 economy of the world”, surpassing the hegemonic United Stated of America (USA). Immediately after learning said headline through Market Watch, the first question that came into my head was wait, “who declared what.” Forbes Magazine (Tim Worstall, Contributor) and Market Watch (Brett Arends) are coherent in saying that it was based on the recent International Monetary Fund (IMF) report, comparative analyses of its 188 member countries’ productivity level.
IMF is one of the specialized agencies of United Nations (UN) and among its functions is to place member states economic activities into surveillance, which means monitoring the flow of Gross Domestic Product (GDP). GDP serves as a determining factor if a country is suffering from inflation and or deflation which dictate purchasing capacity of a consumer, lastly predict and approach poverty line that calls for government’s intervention to increase hedge fund and or to attract investments. Therefore; IMF is no doubt has the financial expertise and authority in declaring this economic movement.
The report analysis was based on the following factors sales of goods and services using Purchasing Power Parity (PPP) Theory:
First, it should be understood with clarity that it was extracted from the number of total SALES OF GOODS AND SERVICES of the whole Chinese region, including import and export. In this scenario, it is not safe to argue that China’s huge population was the sole factor in deriving at “World’s Number 1”, rather the capacity of each individuals to shoulder the cost. Arriving to a conclusion of booming economy and almost non scarcity of labor opportunities.
This excludes military capacity, basic in political law that hegemonic state consist of two (2) factors, world’s number 1 economy and at the same time, military.
Second, Purchasing Power Parity (PPP) is defined by Mike Moffatt: “A theory which states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at the rate of exchange are equivalent.”
Purchasing Power Parity (PPP) works for example: “Ballpen X” is a US manufactured, sourced brand, while the same was exported to China. If “Ballpen X” is sold at US domestic retail price say 1 USD vs China’s selling price in Yuan (less than a dollar) then there will be more buyers in the latter compared to the former. In other words, this exchange rate affects the buying capacity between these countries including the volume of output of sales. The fault in this model is the failure to consider additional price to be embedded due to export expenses, freight and customs fees. Hence, even if, China’s RMB is lower than USD, if an additional price is shifted to burden the buyer, how come that it may caused such a huge volume disparity.
Then, let us talk about equilibrium in exchange rates, is it even nearly possible to achieve this theory. We all know that the increase and decrease of exchange rates is based on a country’s economic and political stability. Meaning, no country will be placed on the same history in a day, ergo, it is more appropriate to assume that there will be no equilibrium.
Assuming but not conceding, there is a problem with United States’ monetary flow, then the government should look at how it can be more financially flexible in terms of exchange rates, if possible. On the larger scale, many of United States biggest manufacturing brands, i.e. confectionery companies are leveraging by going-out of its comfort zone and tapping Chinese local markets on a Joint Venture partnership. It is not a question why China is eyed by these foreign brands, because it has the largest number of population which translate huge impact on sale, and capable of providing manpower. It is about time to accept this economic shift, misapplication of PPP but on its face, China is indeed now the number 1 economy of the world.
Sources / Additional Readings:
1. Tim Worstall, “China’s Now The World Number One Economy And It Doesn’t Matter A Darn”, Forbes Magazine. Link: https://www.forbes.com/sites/timworstall/2014/12/07/chinas-now-the-world-number-one-economy-and-it-doesnt-matter-a-darn/2/
2. Brett Arends, “It’s Official: America is now Number 2”, www.marketwatch.com. Link: https://www.marketwatch.com/story/its-official-america-is-now-no-2-2014-12-04
3. Mike Moffatt, “PPP Theory”, www.economics.about.com. Link: https://economics.about.com/cs/money/a/purchasingpower.htm