U.S. No Longer World's Largest Economy
These figures are measured using purchasing power parity, which takes into account the standard of living of each country. This provides a more fair and relevant measure of GDP.
However, the U.S. still has the largest economy of any single country. The next largest is China, at $7 trillion, followed by Japan at $4 trillion. The largest single EU country is Germany, at $2.8 trillion, which has been surpassed by India, whose GDP was $2.965 trillion in 2007.
What It Means to You
The U.S. economy is growing, but just not as fast as the EU. Many analysts initially said that the EU "experiment" was doomed to failure, since these vastly different countries could never work together as a unified economy. Instead, the EU is so successful that areas such as Southeast Asia and Latin America are considerering unified economies.The EU now has an economy of scale that eats into the comparative advantage the U.S. has traditionally enjoyed. Furthermore, the EU's currency, the euro, is now competing with the dollar as a global currency. Thanks to these competitive pressures, a U.S. recession could be the precursor to a lower standard of living that may not return to previous, stronger levels.
Comments
The EU isn’t a nation state.
Hi Andrew,
True,and I mentioned that in the third paragraph. However, what I think is interesting is that the EU is a new type of economic entity…not a nation state, but functioning as one economically.
ASEAN is also talking about forming a similar economic entity, with a single currency as well.
Meanwhile, in the U.S., protectionism is rearing its ugly head…which would only leave the U.S. economy further behind the trend.
Kimberly
A friend of mine and I have discussed relative sizes of national economies and I would appreciate some well-informed input, since neither she nor I are economists. She claims that China’s economy is now bigger than the U.S. economy’ and India is now 3rd.
My inclination is to use GDP as the basis of comparison, but factoring in Purchasing Power Parity can give a rather different picture of the relative sizes of national economies. How misleading are those figures?
The different GDP rankings among countries which put the U.S, China and India at 1st , 4th and 12th and at 1st, 7th and 12th, respectively. (This discrepancy is likely due to a recent release of previously undisclosed sectors of China’s economy.) PPP adjustments put them at 1st, 2nd and 4th, respectively.
How far off would you say she is in her claims?
I would love to know what her source is.
I use the CIA World Factbook, GDP using PPP. It puts EU first, U.S. second and China third.
I can’t make any comment about her claim without knowing the source.
Kimberly
Never count the USA out. For strucrual reasons it will be the best economy with one of the highest living standards for years to come. China and India habe a lot of people but are contrained by corruption, human rights, polution, etc. The true judge of a prosperous country and that countries might, is how many people would move there in a heart beat if they could.
Hi Cess,
Well, that great economy of yours just required $700 billion to survive (have fun paying that back). Where do you think that money came from? If China didn’t continue to lend you the money, the US economy wouldn’t exist. As a matter of fact, if China were so inclined, they could dump their trillions of US investments tomorrow, and there wouldn’t be a US economy anymore. Luckily for all of us, this is not (yet) in China’s interest.
That many people in the third world want to move to the US has much more to do with Hollywood dreams than the state of the US economy. Most immigrants end up in poverty being exploited in the US, and these people would in general be much better of in countries such as Holland or Sweden. However, Holland hasn’t spent the last 50 years trying to convince their own people and the rest of the world how wonderful it is…
In the last paragraph of the article why do you say the euro is now competing with the dollar as a golbal currency? It is actually, and for a long time now, more valuable. The EU economy is stronger than the US, give the facts don’t sugar coat it.
Hi Nacho,
There are still more holdings of the Dollar than the Euro by a long shot - and that’s even before everyone started hoarding dollars.
Kimberly
As usual, most of the arguments presented here are purely a matter of perspective… the EU is a group of nations and is therefore subject to political problems between these nations. California doesn’t have an argument with Texas and hurt the entire US economy, but tension between nations happens all the time. Comparing the US economy to the EU is riddled with problems because the Euro is just a currency type and doesn’t reflect anything else these nations have in common. As far as the 700 billion dollar “bailout” is concerned, it’s not a bailout! The US government is purchasing assets at pennies on the dollar to reestablish a fair market trading value for those notes. In 10 years they will sell those notes and turn a large profit. The US is the worlds largest economy BY FAR and this is easily demonstrated when the US economy shows any signs of weakness and the rest of the world takes a tumble.
Kim,
Like the rest of the bloggers, I don’t think the comparison is fair.
Also the Purchase Power Parity (PPP) is a poor metric to use since it overstates the actual economic activity in a country. Purchase Power parity only makes an assessment of price equivalence of a “basket of goods”. People in each of these countries do not consume at those prices. For example, an Intel does not sell its Core 2 Duo at a price deflated by the PPP of 5 in China.
Ceteris Paribus, as the dollar strengthens and EURO weakens, the US economy will be larger again - which again is an improper assessment.
The PPP and the Foreign Exchange rates do not establish the size of or the prosperity within an economy. It is just good discussion.
As Kimberly mentioned, the EU has been surprisingly successful in it’s efforts of functioning as one economic region. This far surpasses just having a single currency by the way. Their economic policies are more and more in tune as well.
The geo-political arena is changing rapidly and it might very well be the case that the EU will be far more capable of fulfilling the role of the world’s leading entity than the USA.
The problem for the USA is that they are so determined to change the world that their political capital is deteriorating even more rapidly than their economic status.
Whe’re witnessing what is probably going to be the last decade of the USA as the dominant nation in the world. The worlds biggest single nation economy will be that of China, the world’s reserve currency will be the EURO, and the preferred partner in case of geo-political problems will probably be the EU (exactly because they don’t fly their bombers into every conflict right away, with the obvious aim of bringing coca cola democracy).
It’s probably for the best too.
The USA remains number one in technological innovation, the state of California’s GDP beats that of most G20 countries, and so does the economy of Texas. The USA leads in computer technology, space, and academic thought (look at all the Nobel prize winners.
Hi Rocco,
We have been, but will we continue to be? The European Center for Nuclear Research opened the world’s biggest and most complex machine, the Large Hadron linear collider in Cern, Switzerland in September 2008. It will be the center of attention for particle physicists over the next 15 years because of its unique ability to address questions about the structure of matter and the evolution of the universe.
The U.S., on the other hand, will shut down the world’s largest particle accelerator in 2010. To retain its leadership position, the U.S. needs to increase its particle physics research budget by at least 2-3% per year.
Kimberly