China's Real, Real GDP

I am not an economist. Still, each time I hear Roland Lim of CNA introduce China with the familiar phrase “the world’s second-largest economy,” I cannot help muttering to whoever happens to be sitting nearby: here we go again. 

(Incidentally, each time it came to India, he would, like many western journalists, begin his sentence by "The world's largest democracy." Can't he think of something more relevant?)

Also, we have just heard the US economy expanded at an annualised rate of ~4.3% in Q3 2025 (July to September). This is said to be the fastest pace in two years and exceeded expectations. Is it for real! The US economy can really defy gravity! Thanks to TACO the Great Know All?

Anyone with a working knowledge of macroeconomics would agree that GDP measured at purchasing power parity (PPP) is a more appropriate indicator of the real size of an economy than nominal GDP. PPP-adjusted GDP measures the total value of goods and services produced over a given period after correcting for local price levels and cost differences, thereby better capturing real output and domestic purchasing power.

GDP can be measured in three ways. Here I rely on the most commonly used method, the expenditure approach:

(The other two being (a) the Income approach and (b) the production or value-added approach.

GDP Size: Nominal vs PPP (2025 estimates)

Country	Nominal GDP	PPP GDP
China	~USD 19.2 trillion	~USD 40.7 trillion
United States	~USD 30.5 trillion	~USD 30.5 trillion

By PPP measures, China’s economy is already substantially larger than that of the United States.

GDP Composition (Expenditure Shares)

Component	China	United States
Consumption (C)	~38–40 %	~68 %
Investment (I)	~37–39 %	~17.6 %
Government (G)	~15–16 %	~17.2 %
Net Exports (X−M)	~+5 %	~−3 %

The U.S. economy is consumption-led, with roughly two-thirds of GDP coming from household spending. Investment plays a smaller role, and net exports are persistently negative, reflecting chronic trade deficits.

By contrast, China’s economy is investment-heavy, with a much lower consumption share and a significant positive contribution from net exports.

Why PPP May Still Understate China’s Effective Economic Size

While PPP is clearly superior to nominal GDP for comparing domestic output, it remains imperfect, especially when applied to the components C, I, and G.

My intuition is based on these three facts: The cost of an average meal in China is ¥20-30; in the US, it is $15-25, 5 times! A small car costs about $25K in China; in US, $50K. The cost of building a naval vessel in China is likely to be about 1/3 to 1/2 that of the US cost. Nonetheless, I thought I should seek out ChatGPT to help argue my case. 

(a) Consumption (C)

Many goods and services in China are:

• Non-market priced or underpriced
• Provided at cost or subsidized

Examples include:

• Public transport
• Utilities
• Certain digital services

In addition, informal and family-based consumption is often undercounted in national accounts.

Result: Measured consumption may understate real consumption volume and welfare, even in PPP terms.

(b) Investment (I)
China’s investment purchasing power is exceptionally high because:

• Construction costs are far lower
• Infrastructure is built almost entirely domestically
• Supply chains are internal and tightly integrated

A dollar-equivalent of investment spending in China can buy:

• More kilometers of rail
• More factories
• More energy-generation capacity

While PPP adjustments help, standard PPP baskets are consumption-weighted, which means capital formation and industrial capacity are likely undervalued.

(c) Government Spending (G)

Government output is typically measured as the cost of inputs (wages, materials), not the value of outcomes. This creates a systematic bias.

In China:

• Public-sector wages are low
• State capacity and coordination effects are high
• Scale efficiencies and speed of execution are not priced

As a result, a seemingly “cheap” government project may generate very large real output, especially in infrastructure and logistics.

PPP does not fully capture state effectiveness, implying that China’s real government production capacity may exceed even PPP-implied levels.

Why Economists Still Hesitate?

Despite these points, many economists remain reluctant to say that China’s economy is much larger than that of the United States. The usual argument is that PPP:

• Overweights local services and non-tradables
• Overstates economic power in areas where market exchange and global pricing matter, such as:
• Technology imports
• Foreign asset acquisition
• Financial influence
• Military procurement abroad

This caution may have been reasonable in the past. I am less convinced it remains so today, particularly with respect to the technological frontier.

Conclusion

It is reasonable to conclude that:

• PPP already shows China’s economy to be larger than that of the United States.
• PPP likely still understates China’s real capacity to produce physical goods, infrastructure, and state-directed investment.

To test my intuition, I consulted ChatGPT, which independently reached the following conclusions:

• Consumption: China’s real consumption volume is larger than nominal figures suggest, though still far lower per capita than in the U.S.
• Investment: China’s real investment capacity is likely far greater than PPP GDP implies, particularly in physical and industrial terms.
• Government: China’s real government production capacity is likely understated even in PPP measures.

Taken together, these points suggest that in physical-output terms, China’s economy may be significantly larger than that of the United States, even beyond what standard PPP comparisons indicate.

Of course, on a per capita basis, China still has a long way to go to catch up with the US.

End