After the National Day vacation, talk that "China's economy is about to surpass the US" warmed up. Based on statistics released by International Monetary Fund (IMF) in October using the algorithm of "purchasing power parity" (PPP), China will have a larger economy than the US and become the No.1 in the world this year. However, some experts have pointed out that it is inaccurate to use this calculation and draw any such conclusion.

In 2005, the GDP of China was less than half of US GDP. According to the World Economic Outlook published by the IMF in October, China's GDP is expected to reach $17.6 trillion this year, compared with $17.4 trillion for the US. As a result, based on the IMF estimate China will have the largest economy in the world. Based on the PPP estimate, China's GDP in 2013 was 16.1 trillion dollars. But based on the statistics from the World Bank, China's GDP in 2013 was 9 trillion dollars.

A simple example to explain PPP: A shirt costs less in Shanghai than it does in San Francisco. Though an ordinary worker in Shanghai makes less money than someone in San Francisco, their purchasing power may be the same. When estimating and comparing national economic strengths, the difference in purchasing power should also be taken into consideration.

Many economists agree that using PPP to evaluate the scale of different economic entities is unfair and inaccurate. Shen Jiru, a researcher at the Chinese Academy of Social Sciences explains that PPP usually chooses a selection of merchandise and compares their prices to the calculate exchange rate. For example, a fried bread stick costs 1 dollar in the US, while in China, it is worth 1 yuan. The PPP exchange rate ratio of US dollar and RMB on the fried bread stick is 1, but the real exchange rate is around 6. Consequently, PPP can easily exaggerate China's economic situation.

"When using PPP, it is impossible to compare all the merchandise in both countries; only a group of items can be used. The US and China have great differences in price structure. Some things are very cheap in China, like dental care costs for instance, while some are extremely expensive, like houses and cars. It is quite possible to exaggerate China's economy by using PPP," said Shen Jiru. "The traditional and scientific way — use GDP to see and compare two countries' economic strength."

Deputy Finance Minister of China Zhu Guangyao said at a forum of the Peterson Institute for International Economics in Washington D.C. that there is still a big gap between China and the U.S. in the level of economic development. China as a developing country should continue to implement Reform and Opening up. 

This article is edited and translated from 《IMF：中国超美国成世界最大经济体》，source: Beijing News, Author: Chu Xinyan