Largest Economies in the World

Why China Is the World's Largest Economy

A customer purchases goods at a supermarket in Huaibei, Anhui Province of China.
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 Photo by VCG / Getty Images

In 2018, China was the for the fourth year in a row. It produced according to estimates by the International Monetary Fund. It contributed 19% of the world's total gross domestic product of $135.2 trillion.

The European Union was in second place, generating $22 trillion. Together, China and the EU generate 35% of the world's economic output.

The United States remained in third place, producing $20.5 trillion. The world's three largest economies combined produced 50% of the world's total economy.

No other economy is even close to any of these three. The fourth-largest economy was India, producing $10.4 trillion. Japan was fifth, at $5.6 trillion. Germany, the strongest country in the EU, produced $4.4 trillion. 

These measurements use purchasing power parity to account for exchange rate changes over time. It also adjusts for government rate manipulation. 

Don't start swapping U.S. dollars for Chinese yuan and learning Mandarin yet. These three figures are very close. China's economy is slowing as its leaders attempt to head off an asset bubble through reform. So it's unlikely that the yuan could replace the dollar as the world's reserve currency anytime soon. The dollar is buoyed by the power of the U.S. economy.

Second, it's important to understand how GDP measures a country's economy. GDP has four components: output by households, government, business investment, as well as net exports (exports minus imports). 

The output measured by GDP equals spending, so it takes into account the cost of living. That's why it doesn't cost as much to buy, say, a Big Mac in China as in the United States. The Economist's  reveals what a Big Mac costs in 48 countries.

Outlook

The IMF estimates the world's economy for each year until 2023. By then, the global economy will have grown 31% to $177.4 trillion. China's GDP will increase by 47% to $37.2 trillion. The EU and the United States will each increase 20% since their economies are already fully developed. India is expected to grow 59% while Japan will only increase by 13%. Here is a table comparing the GDP for each in 2018 and in 2012:

Projected Growth of World's 10 Largest Economies

(in Trillions of U.S. Dollars)

Economy    2018     2023 % Growth 
World $135.2  $177.4 31%
China   $25.3   $37.2 47%
EU   $22.0   $26.5 20%
US   $20.5   $24.7 20%
India   $10.4   $16.6 59%
Japan     $5.6     $6.4 13%
Germany     $4.4     $5.2 18%
Russia     $4.1     $4.9 19%
Indonesia     $3.5     $4.9 42%
Brazil    $3.4     $4.2 23%
United Kingdom   $3.0     $3.6 19%

Should the EU Be Counted as an Economy?

Even though the EU produces more, some experts said the United States is still a larger economy. They argue that America is a country while the EU is just a trading area that includes 28 separate member countries.

But the EU confers many rights that make it more than just a free trade zone such as the North American Free Trade Agreement. In addition to tariff relief, the EU allows free movement between the countries for employment and commerce. Furthermore, 19 of these countries share a common currency, the euro. Despite the 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.

The U.S. economy grew 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 eurozone crisis may yet prove them right.

But the EU has achieved an economy of scale that eats into the comparative advantage the United States 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 now those from China, the United States is not the world's largest economy. 

Why Some Still Say the United States Is No. 1

Many sources still say the United States is the world's largest economy. They use the as follows:

  1. United States: $20.5 trillion
  2. EU: $18.7 trillion
  3. China: $13.4 trillion
  4. Japan: $4.9 trillion
  5. Germany: $4.0 trillion
  6. United Kingdom: $2.8 trillion
  7. France: $2.8 trillion
  8. India: $2.7 trillion
  9. Italy: $2.1 trillion
  10. Brazil: $1.9 trillion

These calculations use the official exchange rate instead of PPP. The country's government or central bank sets this rate. It tells you how much the bank will give you in exchange for one unit of your country's currency.

Unlike PPP, it doesn't account for changes in the exchange rate over time. It also doesn't compensate for government manipulation of its exchange rates. PPP takes these variances into account, giving a more realistic picture.

The Bottom Line

As of 2018, the largest economy in the world is China when measured by PPP. The EU is second and the United States is third. But America retains its No.1 rank when measured by nominal GDP. This position has remained unchanged since 1871.

The top 20 economies produce about 81% of the world’s GDP. This statistic is staggering, considering that the rest of the world’s production totals to less than one-fifth of global GDP.