Professor Allison’s X posts on the world GDP ranking, Mar. 14, 2024.
1/ The US vs China—who is growing faster than whom?
— Graham Allison (@GrahamTAllison) March 13, 2024
2/ Because that question has been answered by people using different metrics, it’s understandable that there has been some confusion. In real terms, the consensus supported by the World Bank and IMF agrees that China grew twice as fast as the US: 5.2% versus 2.5%.
— Graham Allison (@GrahamTAllison) March 13, 2024
3/ So why do many news stories claim the US “outpaced” China” in 2023? In part, the US’s 2.5% real growth was a happy surprise—given expectations of a hard landing and recession. Most analysts had expected that the US would grow about the rate it has over the last decade—2.1%.
— Graham Allison (@GrahamTAllison) March 13, 2024
4/ A second factor that has contributed to the confusion is that inflation in the US averaged around 3.5% last year, so measures of nominal growth—that is, real growth plus inflation in prices of items—allowed some to claim that the US grew at 6.3%.
— Graham Allison (@GrahamTAllison) March 13, 2024
5/ A third factor was that the US Treasury had to pay higher interest rates to sell bonds, attracting capital inflows from elsewhere seeking higher returns. As a result, the exchange rate between the USD and the Chinese yuan strengthened from 6.9 yuan/dollar to 7.1 yuan/dollar.
— Graham Allison (@GrahamTAllison) March 13, 2024
6/ Comparing the performance of the German and Japanese economies last year offers another vivid example of this.
— Graham Allison (@GrahamTAllison) March 13, 2024
7/ News stories claimed that Germany's economy overtook Japan's. In fact, in real terms, Germany economy shrank by 0.1% while Japan’s grew at 1.9%. But Germany inflation rate was 6% compared to Japan’s 3%, and the euro appreciated relative to the yen.
— Graham Allison (@GrahamTAllison) March 13, 2024
8/ So, summarize in one line: in 2023, the US grew at 2.5% and China grew at 5.2%; but the US had high inflation, and to pay a higher rate to borrow money, and thus saw its exchange rate appreciate against the yuan, so the US’s GDP “outpaced” China’s.
— Graham Allison (@GrahamTAllison) March 13, 2024