In 2019 China’s workers produced over 99trn yuan-worth of goods and services. America’s produced $21.4trn-worth. Since 6.9 yuan bought a dollar last year, on average, China’s GDP was worth only $14trn when converted into dollars at market rates. That was still well short of America’s.
But 6.9 yuan stretches further in China than a dollar goes in America. One example is McDonald’s, Big Mac. It costs about 21.70 yuan in China and $5.71 in America. By that measure, 3.8 yuan buys as much as a dollar. But if that is the case, then 99trn yuan can buy as much as $26trn, and China’s economy is already considerably bigger than America’s.
We also have compared data on the price of Big Macs around the world since 1986. The result is a rough gauge of the purchasing power of currencies. It suggests that many currencies are undervalued, relative to the dollar, on the foreign-exchange markets (see chart). A few, such as the Swiss franc, are overvalued. Lebanon’s pound was undervalued until inflation took off late last year, raising local prices even as the pound remained pegged to the dollar. The Big Mac alone jumped 38% in price.
Many observers, however, greeted these estimates with skepticism. In 2010 an informal survey by a reporter at Caixin, a financial magazine, noted that several items were dearer in Hangzhou than in its sister city Boston. (It compared apples to apples, and found that the Golden Delicious variety was 37% pricier in the Chinese city.)
The skeptics won some vindication in May when the World Bank released its latest price-comparison exercise. It discovered that things were about 17% more expensive in China, relative to America, than previously thought. At a stroke, China’s GDP fell by over $3.2trn. The estimates suggest China did not overtake America’s economy until 2016.
But are these new estimates any more robust than earlier efforts? Comparing prices across the world is fraught with difficulties. An item may be a staple in one place and a delicacy in another. The World Bank must also decide how much weight to give each item. That depends on shopping habits, which differ—partly because prices differ. It is easy to go around in circles.
So it might help to check the World Bank’s results against a cruder yardstick—like the price of a Big Mac. Our index suggests that the bank now if anything, underestimates the buying power of China’s currency, and therefore its economic size. McDonald’s was once a symbol of America’s economic might. Now the Big Mac shows how its might is being surpassed.