A few months ago press reports, using an exchange-rate measure of GDP, announced that China had become the world's "second-largest economy" just this year. But by a purchasing-power-parity (PPP) measure, which adjusts for the difference in many prices between China and the US, China had become the second-largest economy years ago.

A technical matter: If we measure China's economy in dollars at current exchange rates, it reached $5.9 trillion in 2010, as compared with $14.7 trillion for the US. By a purchasing-power-parity measure, its economy reached $10.1 trillion in 2010. It is that measure that the IMF projects to grow to $18.98 trillion in 2016, putting the US in second place at $18.81 trillion.

However, it is likely that even the IMF's PPP measure understates China's GDP: Economist Arvind Subramanian has estimated that China's PPP GDP in 2010 was already about even with that of the United States.

An IMF spokesperson, quoted yesterday by the Financial Times, weighed in on the debate:

"The IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally ….The Fund believes that GDP at market rates is a more relevant comparison. Under this metric, the US is currently 130 percent bigger than China, and will still be 70 percent larger by 2016."

It is true that the "market rate" measure is better for some comparisons. But one important place where the PPP measure is more relevant is in military spending. The cost of producing a military plane and training a pilot in China is much lower than in the United States. Washington's current policy is to maintain military supremacy in Asia, but an arms race with China could make the Cold War look cheap by comparison. The Soviet Union's economy was just a quarter of United States' economy when we had that arms race. If the US were to have a serious arms race with China, we could forget about Medicare, Social Security, and most of what our federal government spends money on.

Fortunately, a new Cold War with China is not in the cards for now. But the size of China's economy is another good reason to make sure that it doesn't happen.

Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C.

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