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Vol. 6, No. 6
June 2011­­

Insights from the

Federal Reserve Bank of Dall as

Will China Ever Become as Rich as the U.S.?
by Mark A. Wynne

Many countries have
expanded at a rapid pace
for long periods. But as
they get richer, their growth
rates tend to slow and
they can’t attain the U.S.
standard of living.


wenty years ago, a visitor to Beijing would have been struck by
the bicycle’s popularity as a form of mass transportation. Today,
auto congestion and pollution on the increasingly clogged roads of China’s
capital city are pervasive features. In a little more than three decades, China
has transformed itself from a largely closed agrarian society to an urban
exporting nation commonly viewed as the workshop of the world.
At current growth rates, China will be the world’s largest economy
sometime in the next decade. But will it ever be the richest? Though providing a definitive answer is difficult—at least in terms of standard of living—examining how China and other developing economies grow offers
insight into how, with maturity, these nations may approach the technological leadership and, by extension, the standard of living of the U.S.
Gross domestic product (GDP), a measure of everything produced
within a country’s borders, is the most widely available means of calculating just how rich a country and its citizens are.1 In 2010, China’s GDP was
14.12 trillion yuan (measured in 1990 yuan to control for inflation), according to the nation’s statistical office; U.S. GDP was $13.25 trillion (measured
in 2005 dollars to control for inflation).
Two adjustments are required to compare the two numbers and
determine which economy is bigger. We set a common year for both
price series and convert them to a common currency unit. The simplest
approach is to measure GDP in U.S. dollars at 2005 prices and use 2005
exchange rates. Doing so results in estimated 2010 Chinese GDP of $3.88
trillion in 2005 dollars, or just less than 30 percent of U.S. GDP. China’s
economy will exceed that of the U.S. in 2025 if it continues expanding at
its past-decade rate of just more than 10 percent a year and the U.S. keeps

growing at the 1.7 percent annual rate
it experienced during the period.
Per capita GDP allows us to compare the relative well-being of residents
of the two nations. Based on the 2010
U.S. population of 309 million, per capita GDP was $42,874 last year. China,
with a 2010 population of 1.34 billion,
had per capita GDP of $2,893 last year,
or 6.7 percent of the U.S. figure.
Making Cross-Country Comparisons
However, such comparisons are
problematic, especially when comparing living standards across countries. For such questions economists
prefer to use so-called purchasing
power parity (PPP) exchange rates
rather than market exchange rates.
Purchasing power parity entails adjusting exchange rates so that each currency can purchase a like amount of
goods. These rates take into account
that many so-called nontraded goods
(items exclusively produced for
home-country consumption) are a lot
cheaper in poorer countries and allow
a more accurate comparison of living

standards across nations. The most
recent estimates, compiled by researchers at the University of Pennsylvania
for 2009, put China’s per capita GDP
in 2005 U.S. dollars at $7,634, or about
18 percent of the U.S. sum of $41,099
that year. That is up from 8 percent of
the U.S. level in 2000.
So, is it likely that Chinese living
standards will ever match those in the
U.S.? To get a handle on this question,
it is useful to look at other countries’
experiences over a long period. Many
nations underwent development miracles in the latter half of the 20th century. Reviewing data on the evolution of
global living standards over the period
reveals two interesting facts. First, there
are several countries where per capita
GDP exceeds that of the U.S., often by
significant amounts. Almost all of these
nations are oil exporters. For them, per
capita GDP may not accurately measure living standards because a significant component of economic activity
involves depleting the country’s natural
resources or wealth. Thus, we exclude
those nations from the analysis.2

Chart 1

Per Capita GDP Growth Slows as Countries Develop
(Ten-year average growth rate versus level of real per capita GDP, 1950–2009)
Growth rate, real per capita GDP (percent)







Real per capita GDP in 2005 purchasing power parity-adjusted dollars


NOTE: Each square represents a single country over a decade.
SOURCES: Penn World Tables, version 7.0; author’s calculations.

EconomicLetter 2

F edera l Re serve Bank of Dall as

Second, other countries with per
capita GDP significantly exceeding
the U.S. level are generally small, with
large, offshore financial centers. Given
the well-known difficulties associated
with determining financial-sector output, per capita GDP in such nations
may not accurately measure living
standards. So we also exclude them.3
Assessing an Initial Growth Spurt
Chart 1 is a scatter plot of the
growth rate of real (inflation adjusted)
per capita GDP against the level of per
capita GDP for a large group of countries.4 Specifically, it shows the average
growth rate over one decade against
the level of real per capita GDP at the
beginning of the decade.
Basic growth theory suggests that
poor countries should grow more rapidly than rich countries. That is, the
lower the level of per capita GDP at
the beginning of a decade, the faster
a country should expand over the following 10 years. And, indeed, this is
generally what the chart shows. Note
that some poor countries experienced
growth disasters: Despite low levels
of per capita GDP, living standards
declined over 10 years or more.
Excluding these observations from the
sample, the tendency of growth to
slow as countries get richer becomes
more apparent.
Chart 2 shows how successful various countries have been at catching
up to the U.S. Each point represents
an observation for a single country for
a single year.
We measure real per capita GDP
in PPP dollars on the horizontal axis,
while on the vertical axis we show
per capita GDP as a percentage of
U.S. per capita GDP. What is striking
about the figure is that many countries
come close to achieving U.S. standards
of living, but essentially none achieve
This is even more apparent in
Chart 3, which for comparison presents data for the wealthy, non-U.S.
(G-7) countries and China. There was
a period of rapid growth following the

destruction of World War II when living standards rose in countries such
as Japan, Italy and France. But none
of them caught up with the U.S. The
chart reveals just how far China has
to go to match the standards of living
currently enjoyed by the citizens of
these countries.
Failing to Reach the U.S.
Why do countries fail to reach U.S.
living standards? Therein lies something
of a mystery. Economists speak of a
middle-income transition, or middleincome trap, where previously rapidly
growing economies slow down dramatically and never achieve the same
standard of living as the technological
leader. The reasons for this are unclear.
It may be that policies appropriate
for one stage of development are less
effective at later stages and that the
institutional structure lacks the agility to
adjust as circumstances change.
In a recent paper, economists
Barry Eichengreen, Donghyun Park
and Kwanho Shin examined a large
number of growth slowdowns over the
past 50 years (declines in per capita
GDP growth rates of at least 2 percentage points from rates of at least 3.5
percent per annum).5
The economists looked for factors correlated with these declines.
They found that the slowdowns tend
to occur when per capita GDP reaches
about $17,000 in 2005 PPP-adjusted
dollars and when per capita GDP
reaches about 58 percent of per capita
GDP in the lead country. Maintenance
of an undervalued exchange rate
also appeared correlated with the
Barring some major shock, it
appears China’s economy will inevitably become larger than that of the U.S.
sometime in the next decade. In many
ways, this simply reflects the sheer size
of China’s population, currently more
than four times that of the U.S. population. Even so, a lot of uncertainty
remains about whether individual
Chinese citizens will ever be as rich as
their American counterparts.

Chart 2

Countries Approach but Don’t Surpass U.S. Per Capita GDP
(Data for the period 1950–2009)
Real per capita GDP relative to U.S. per capita GDP (percent)
U.S. real per capita GDP







Real per capita GDP in 2005 purchasing power parity-adjusted dollars


NOTE: Each square represents a single country over a one-year period.
SOURCES: Penn World Tables, version 7.0; author’s calculations.

Chart 3

G-7 Members and China: Catching Up with the U.S.?
(Data for the period 1950–2009)
Real per capita GDP relative to U.S. per capita GDP (percent)
U.S. real per capita GDP







Real per capita GDP in 2005 purchasing power parity-adjusted dollars


NOTE: Each square represents the country over a one-year period.
SOURCES: Penn World Tables, version 7.0; author’s calculations.

Considering the Future
As noted, many countries have
expanded at a rapid pace for long
periods. But as they get richer, their

F ederal Reserve Bank of Dall as

growth rates tend to slow and they
can’t attain the U.S. standard of living.
For most of the 20th century, the U.S.
defined the technological frontier to

3 EconomicLetter

which other countries could aspire.
That remains the case today, and
absent any major policy errors in the
U.S., it should continue.
In 1820, China was responsible
for about one-third of global GDP,
while the U.S. accounted for just 1.8
percent. So, the likely shift in relative
size in the next decade is in some
ways simply a return to what we
previously experienced.6 Even then,
U.S. living standards were twice those
of China. If China were to become
the first country to completely close
the gap with the U.S., it would mark
a significant break with development patterns observed over the past
Wynne is a senior economist and vice
president at the Federal Reserve Bank of
Dallas and director of its Globalization
and Monetary Policy Institute.
Special thanks to Payton Odom for research

The ideal way to calculate wealth would involve

computing the value of all assets owned by a
country’s citizens. This accounting would include
the value of the country’s natural resources, the
accumulated stock of physical capital and the
value of foreign investments. But such measures
are hard to come by, and instead we often
resort to more readily available proxies, such
as the amount of income annually generated or


The countries specified as oil exporters are

the same ones the International Monetary Fund
so designates in its World Economic Outlook
publication: Algeria, Angola, Azerbaijan, Bahrain,
Republic of Congo, Ecuador, Equatorial Guinea,
Gabon, Iran, Kazakhstan, Kuwait, Libya, Nigeria,
Norway, Oman, Qatar, Russia, Saudi Arabia,
Sudan, Syria, Trinidad and Tobago, United Arab
Emirates, Venezuela and Yemen. We also exclude
Brunei Darussalam because of the large size of its

is published by the
Federal Reserve Bank of Dallas. The views expressed
are those of the authors and should not be attributed
to the Federal Reserve Bank of Dallas or the Federal
Reserve System.
Articles may be reprinted on the condition that
the source is credited and a copy is provided to the
Research Department of the Federal Reserve Bank of
Economic Letter is available free of charge by
writing the Public Affairs Department, Federal Reserve
Bank of Dallas, P.O. Box 655906, Dallas, TX 752655906; by fax at 214-922-5268; or by telephone at
214-922-5254. This publication is available on the
Dallas Fed website,

natural gas sector relative to GDP.

The countries excluded are those designated

offshore financial centers by the Financial Stability Forum, namely Antigua and Barbuda, the
Bahamas, Bahrain, Barbados, Belize, Bermuda,
Costa Rica, Cyprus, Hong Kong SAR, Ireland,
Lebanon, Luxembourg, Macao SAR, Malta,
Marshall Islands, Mauritius, Panama, Samoa,
Seychelles, Singapore, St. Kitts and Nevis, St.
Lucia, St. Vincent and Grenadines, Switzerland
and Vanuatu.

See Penn World Table Version 7.0, by Alan Hes-

ton, Robert Summers and Bettina Aten, Center
for International Comparisons of Production,
Income and Prices at the University of Pennsylvania, May 2011.

See “When Fast Growing Economies Slow

Down: International Evidence and Implications
for China,” by Barry Eichengreen, Donghyun Park
and Kwanho Shin, National Bureau of Economic
Research Working Paper no. 16919, March 2011.

See Chinese Economic Performance in the Long

Run, Second Edition, Revised and Updated: 9602030 AD, by Angus Maddison, Paris: Organization for Economic Cooperation and Development,

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