China beats Japan in purchasing power

China beats Japan in purchasing power

By Chris Bryant in Washington

Published: April 11 2008 19:36 | Last updated: April 11 2008 23:57

China has passed Japan to become the world’s second-largest economy, while India is in fourth place, the World Bank confirmed on Friday, as it unveiled a report examining the relative purchasing power of global economies.

The report found that developing economies’ share of total global output had risen significantly in the past decade, as nations such as India and China had grown far faster than their richer counterparts.

As a result, developing nations accounted for 41 per cent of $58,600bn (€37,000bn, £29,600bn) in total global economic output in 2006 – up from 36 per cent in 2000.

“When we measure economies on a comparable global scale, the growing clout of developing countries comes into sharp relief,” said Alan Gelb, the World Bank’s acting chief economist.

The findings come from a study published by the bank on the eve of its spring meeting in Washington – the first time since 1993 that relative purchasing power in many countries has been examined. Purchasing power parity is used to determine the relative value of currencies, based on what money can buy in countries, which varies according to the availability and demand for goods.

Local currencies were converted to US dollars, to provide a better comparison of market size, structure and what citizens can afford.

Based on these new calculations, the bank said China was the world’s second-largest economy, behind the US, although it revised down an earlier estimate of China’s overall share of the global economy. The result puts China two places higher in the rankings than in appears when gross domestic product is calculated at market exchange rates. Japan, India and Germany filled the re-maining places in the bank’s list of top five economies by gross national income.

Developing economies were on average 2.2 times larger when measured by purchasing power rather than by exchange rates.

Middle-income economies produced 33 per cent of global GDP in 2005, compared with 19 per cent by market exchange rates, while low-income economies accounted for 7 per cent of total GDP compared with 3 per cent by the exchange rate method.

While inequality between economies is less when measured by purchasing power, GDP per capita continues to lag far behind in developing countries.

The report found that GDP per capita in rich states was more than five times higher than in middle-income economies and more than 19 times higher than in low-income ones. Half the world’s people consumed less than $1,300 a year in 2005. The bottom quarter consumed under $660 when adjusted for purchasing parity.