Critical Analysis Essay about economic issue Example | Topics and Well Written Essays - 750 words - 2

Critical Analysis about economic issue - Essay Example Although the time is still unclear, if current impressive growths of the Chinese Economy continue for the unforeseeable future, there is no doubt that the Chinese economy will be the largest in the World (Finn, 43). The World Bank statistics compared the economies of the US and China in 2012 using nominal GDP figures. In 2012, the World Bank valued the US economy at $16 trillion. On the other hand, it estimated the Chinese economy at $8 trillion, half the size of the US economy (Finn, 43). Some economists used these statistics to conclude that the China will not be in a position to overtake the US as the largest economy in the world. However, these estimates may be misleading, as they do not take into account the fluctuations of the exchange rates. To compare these two economies by nominal GDP size, analysts must convert the size of the Chinese economy from Yuan to dollars using the market exchange rates. As a result, this method ignores the fluctuation of the Yuan to the US dollars. In addition, the US treasury and some economists believe that China undervalues its currency to improve its competitive advantage in international trade. Currency devaluation makes a country’s exports cheaper, while imports become expensive. This encourages exports while discouraging imports therefore, creating a positive balance of trade. If indeed the China undervalues its currency, it follows that estimating its size using the US dollars will considerably understate the size of its economy. As a result, the Chinese economy may be larger than nominal GDP figures estimate. Besides devaluing a currency by, for instance 10%, does not portend a decline in the economy by 10%. National Intelligence Council (16) states that a better way to compare the size of the Chinese and US economies is by the use of Purchasing Power Parity (PPP). PPP rates consider the different costs of goods in various countries.