1. News & Issues
Send to a Friend via Email

World's Largest Economy

By

The world's largest economy

The euro represents the EU's monetary union.

(Photo: Jasper Juinen / Getty Images)
The European Union (EU) has the world's largest economy. In 2012, it produced $15.97 trillion, barely beating the U.S. with $15.94 trillion. Together, the EU and U.S. generate 38% of the world's economic output of $84.97 trillion.

The EU first achieved its leading status in 2007. That year, its Gross Domestic Product (GDP) was $14.4 trillion, while U.S. GDP was only $13.86 trillion. The EU has held onto its premier position, despite the 2008 financial crisis and the eurozone debt crisis. (Source: CIA World Factbook, Rank Order GDP)

Closing in on the heels of the two largest economies is China, which produced $12.38 trillion in 2012. All told, the world's three largest economies contribute $44.29 trillion, more than half of the world's total GDP.

No other economy comes even close. The fourth largest economy is India, only $4.784 trillion. Japan is close behind, at $4.525 trillion. Germany, the strongest country in the EU, is $3.123 trillion. (Source: CIA World Factbook, Rank Order GDP)

How the Recession Affected the Global Ranking:

The EU and U.S. economies maintained their share of the global economic output. China was the big winner. It now produces 60% more than in 2007, when its GDP was $7 trillion. India is also a big winner. Its GDP increased 52% from its 2007 output of $2.965 trillion. Japan barely gained any ground -- its GDP was $4 trillion in 2007. Germany's GDP only rose 20% from its $2.8 trillion output in 2007. (Source: U.S. No Longer World's Largest Economy, February 12, 2008)

Should the EU Be Considered the World's Largest Economy?:

Even when the EU produced more, some experts said the U.S. was still the world's largest economy. They argued that the U.S. is a country while the EU is really just a trading area that includes 27 separate countries. However, the EU confers many rights that are superior to a free trade zone( such as NAFTA). In addition to tariff relief, the EU allows free movement between the countries for employment and trade. Furthermore, 13 of these countries share a common currency, the euro. Despite the ongoing 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.

How Economies Are Measured:

A country's economy is measured by its Gross Domestic Product, or GDP, which has four key components. It adds together spending by households, government and business investment. It also adds net exports, which is exports minus imports. To find out more, see Components of GDP.

To compare each country's GDP, purchasing power parity must be used. This takes into account the standard of living of each country, thus providing a more fair and relevant measure of GDP.

What It Means to You:

The U.S. economy had been growing more slowly than the EU. The eurozone crisis changed all that. 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. The ongoing eurozone crisis may yet prove them right. However, until then, the EU experience was so successful that areas such as Southeast Asia and Latin America were considering unifying their economies and considering a unified currency. They are obviously waiting to see how the eurozone crisis resolves before following that model.

Nevertheless, the EU has achieved an economy of scale that eats into the comparative advantage the U.S. has traditionally enjoyed. Furthermore, the EU's currency, the euro, has successfully competed with the dollar as a global currency. Thanks to these competitive pressures, and those from China, the U.S. may never again regain its #1 spot as the world's largest economy. Article updated JUne 21, 2013

©2014 About.com. All rights reserved.