Will China's Economy Surpass That Of The United States?

About a month ago, I read an intriguing article that suggested that China’s economy would be ahead of the United States as soon as 2030 or perhaps earlier. On the one hand, this makes sense- the article says, “The health of the global economy increasingly will be linked to progress in the developing world rather than the traditional West.” I could easily see this happening. China has definitely seen the greatest spike in economic growth over the long and short term. On the other hand, the patriot side of me simply cannot believe the idea that the U.S. will be surpassed in the global economy that quickly, given the enormous head start we already have. (As of 2011, the United States’ economy was still twice as large as that of China- about 15 trillion to 7 trillion, respectively[1])

When it comes to even statistics, it’s sometimes difficult to eliminate bias. The statistics tell no lies, of course, but the statistician can easily manipulate the data to draw the conclusion that he/she wants to. This can be achieved by only including certain data in a model, for example, or even by blatantly ignoring a significant trend in the data when drawing a conclusion. One could draw that same conclusion that the U.S. has quite a cushioned lead over China, but that would ignore the fact that China’s nominal GDP grew nearly three times as fast from 2010-2011[2].

However, the statistician cannot rely solely on statistics alone. Context and outside information are both needed to present a strong model as well. For example, it is unrealistic to believe that because a baseball player strikes out, he is beginning a brutal slump, just as it’s unrealistic to believe that a country’s economy will immediately go into a terminal downwards spiral because it entered a small recession. Yes, sometimes this will happen, but the probability is still very low.

My task for today’s post is to weigh the claim that China will have surpassed the United States in nominal GDP by 2030, whilst trying to balance the statistics with context and empirical evidence- without letting bias enter the equation. There are many different models I could establish with the amount of data available on this subject- but which is most likely to occur?

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While the global economy continues to grow, it doesn’t grow at the same rate for every country. Some countries experience periods of great economic growth while at the same time other economies begin to decline. This isn’t a random phenomenon; there are many factors that go into it, but in the end it can be boiled down into simple supply and demand economics: The country that has the most of what people want will do the best. If a country can no longer produce or manufacture what is in demand, it will go into decline.

The United States has enjoyed its position at the forefront of the global economy for a long time, but a look at this long term graph (1970-2010) suggests that we have entered a period that could result in economic decline (beyond that which we’ve already experienced, of course):

It looks like the United States is beginning to be out-produced by other countries- namely, China. It’s not an exaggeration to say that other countries are becoming more innovative than the U.S., either[3].

A brief look at these pieces of evidence could be enough to convince someone that the U.S. economy will soon fall behind China. But take a closer look at the graph above: it’s actually set on a logarithmic scale. In this format, an exponential plot would appear linear, and a linear plot looks something, well, more like the U.S. plot. Here’s the same data set on a linear scale:

And a graph for the short-term as well:

These look a lot more promising for the United States. This is just an example of how easy it is to manipulate data to appeal to one’s bias.

 

There are a few other things we should consider rather than just a straight GDP plot. What about the change in GDP from year to year? The derivative of the graphs above could provide a good idea of if and how the landscape of the global economy is changing.

For these and future plots I’m going to eliminate most of the countries listed so that the graph is less cluttered. The seven countries I decided to leave in (before any of the plots were made) are the USA, China, and Japan, the three clear economic leaders; three more countries that are beginning to develop strong economies: Brazil, India, and Indonesia; and Russia, which saw decline after the fall of the Soviet Union and whose economic future is at a crossroads of sorts.

In the short-term, it’s clear that the global economy is filled with complex connections: Every country took quite a hit in 2009. However, all four of the Asian countries still saw an increase in GDP whereas Brazil, the U.S., and Russia saw declines.

It should also be noted that China clearly had a fast recovery and has continued that growth through 2011, while several other countries had strong recoveries in 2010 but did not continue the trend through 2011.

Here’s the derivative of long term nominal GDP. China clearly has shown strong growth recently:

I finally put all of my data together to create a couple of models based on long-term and short-term GDP, and extrapolated them out to the year 2030. The results were somewhat surprising:

Long-Term Graph

 

Both models suggest that China will surpass the United States well before 2030. There were several other models that had the US remaining on top, or even Japan or India surpassing the other nations. But I’m only posting these two because I feel these two simulations were the most likely to happen. Of the two, I feel much stronger about the former: I don’t see anything that suggests the US’s productivity will go down, but nothing suggests the opposite either. Meanwhile, China’s recent gains will probably continue.

We don’t know for sure what will happen. There’s another trendline for China that suggested it would have nearly the exact same GDP as the US in 2030, and it fit all of the data points through 2005- but because of the spike in 2010, the model no longer fits very well.

My own personal opinion is that the U.S. and China will probably have fairly similar nominal GDP values in 2030. It’s unrealistic to assume that China will continue to have such incredible economic growth as we’ve seen in the past few years, but it is also clear that China will have a strong economy for years to come. I’ll be the first to admit that there could easily be some potential bias in this conclusion, but I believe that I’ve been able to balance the statistics and outside information well enough to give this prediction merit.

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My data: https://docs.google.com/spreadsheet/ccc?key=0AnZrkjWWJajQdExRaGJnMkxCcVNsVXNPbml0Q0pKdmc

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[1] International Monetary Fund

[2] United Nations Statistics Division (http://unstats.un.org/unsd/snaama/selbasicFast.asp)

[3] Baltimore Sun: “U.S. losing ground in engineering” http://articles.baltimoresun.com/2005-08-14/business/0508130255_1_engineering-graduates-engineering-trends-science-and-engineering