Comparison of the Economic Scale of China and the United States from the Perspective of Exchange Rate Method and Purchasing Power Parity Method

Recently， people have been discussing a heated topic： the gap between China’s gross domestic product （GDP） and that of the United States is getting bigger and bigger. According to statistics from the International Monetary Fund （IMF）， calculated by the exchange rate method， in 2021， China’s and the United States’ nominal GDPs were 17.7593 trillion US dollars and 23.5941 trillion US dollars respectively， with China’s nominal GDP accounted for 75.27% of the United States’; in 2022， China’s nominal GDP and that of the United States were 17.8485 trillion USD and 25.7441 trillion USD respectively， with China’s nominal GDP accounted for 69.33% of the United States’; in 2023， the nominal GDPs of China and the United States were 17.662 trillion US dollars and 27.3578 trillion US dollars respectively， with China’s nominal GDP accounted for 64.56% of the United States’. These data show that the gap between China’s nominal GDP calculated by the exchange rate method and that of the United States is getting bigger and bigger. However， according to statistics from the same database of the IMF， in 2021， 2022 and 2023， China’s real GDP growth rates were 8.4%， 3.0% and 5.2% respectively; the real GDP growth rates of the United States were 5.8%， 1.9%， and 2.5% respectively. This brings up a question： since China’s actual GDP growth rate is much higher than that of the United States， why has the gap between China’s nominal GDP calculated by the exchange rate method and that of the United States widened？

Reasons for the Widening Gap between China’s Nominal GDP Calculated by Exchange Rate Method and That of the United States

The gross domestic product represents the total value of goods and services produced within a country and measured in monetary terms. It reflects the economic scale of a country. However， GDP cannot fully reflect the level of economic development of a country. The level of economic development of a country is reflected in the level of science and technology， per capita GDP， industrial structure， etc. There are two points that should be noted in the international comparison of GDPs， which are：

First， what to compare. GDP can be divided into nominal GDP and real GDP. Nominal GDP refers to GDP calculated at current prices， that is， the product of the price of the current year multiplied by the number of goods produced in the current year; real GDP is calculated at constant prices， that is， the product of the price of a certain period as standard multiplied by the number of goods produced in the current year. At present， a GDP of a certain year announced by a statistical agency of a country is usually nominal GDP ， but the GDP growth rate announced is usually the real GDP growth rate.

Second， how to compare. If the comparison is made using the exchange rate method， the average exchange rate of the local currency against the US dollar in the foreign exchange market is used to convert the GDP of each country calculated in local currency into GDP calculated in US dollars. The exchange rate of each country’s local currency against the US dollar is determined by the supply and demand situation in the exchange process of the two currencies in the foreign exchange market， and has no necessary relation with the production of these countries’ goods， but the appreciation or depreciation of the local currency against the US dollar has a great impact on the GDP figures calculated by the exchange rate method.

China’s real GDP growth rate is higher than that of the United States， but the gap between China’s nominal GDP and that of the United States is widening. The reasons lie exactly in these two points above.

First， in 2020， COVID-19 pandemic outbreak occurred worldwide， and the U.S. economy fell into recession. The U.S. Federal Reserve System issued a large amount of currency in an attempt to overcome the recession by stimulating demands of consumption and investment. However， due to the excessive issuance of currency， severe inflation occurred in the United States. According to statistics from the Bureau of Economic Analysis of the U.S. Department of Commerce， the average prices of goods and services involved in the U.S. GDP rose by 7.05% and 3.63% in 2022 and 2023 respectively.

During this period， the People’s Bank of China also issued a large amount of currency， but not excessively， so there was no inflation in China. The National Bureau of Statistics of China did not publish the GDP converted price index， but in 2022 and 2023， China’s consumer price index （CPI） rose by 2.0% and 0.2% respectively， and the industrial producer price index （PPI） rose by 4.1% and -3.0% respectively. The increase in the price level of the United States was greater than that of China， offsetting the impact of the smaller real GDP growth than China， resulting in a higher nominal GDP growth rate in the US than that in China.

Second， in the case of severe inflation in the United States， the Federal Reserve System of the United States began to shrink the currency and aggressively raise the benchmark interest rate in 2022 to curb inflation. The US dollar is the most important international reserve currency. The rise in the US dollar interest rate has led to the inflow of funds from other countries into the United States， and the exchange rate of the US dollar against other countries’ currencies has appreciated. According to statistics from the People’s Bank of China， the average mid-point exchange rate of the RMB against the USD in 2021， 2022 and 2023 was 6.42 RMB/USD， 6.7 RMB/USD， and 7.02 RMB/USD， respectively. This means that in order to convert the nominal GDP calculated in RMB to the nominal GDP calculated in US dollars， the nominal GDP in 2021， 2022 and 2023 must be divided by 6.42， 6.7 and 7.02 respectively and China’s nominal GDP in US dollars will naturally be less.