Well, it’s official now…

China has become the world’s second largest economy, producing  $1.337 tn in the second quarter relative to Japan’s $1.288 tn.  A few quick thoughts:

1) It’s hard to think of an event that is of so much symbolic importance and such little substantive importance.  If you’ve been paying any attention to what’s been going on in China for the past several years, this news shouldn’t shift your priors about the fundamentals of China’s economy at all.  (And I’ll say the same thing 19 years from now, when China overtakes the US to become #1.)

2) Many commentators are stressing that this is as much a story of Japan’s decline as it is one of China’s rise.  In some senses this is necessarily true, as in US$ terms Japan’s economy pretty much hasn’t expanded at all over the last 15 years, which certainly made it a lot easier for China to catch up.  But generally I don’t buy that much into tales of Japan’s woeful economy; despite the lost decade (or two), I don’t actually think the gains in quality of life for the average Japanese have trailed that far behind those of the average American or European.

3) In discussing the China/Japan comparison, Matt Yglesias says many things I said three months ago.  The key point from my earlier post: China today looks a lot more like Japan of the 1950s than Japan of the late 1980s.

4) A couple small points about measurement.  First, no one really knows the extent to which Chinese GDP data reflect reality, but we can be pretty sure that reported GDP is probably off by a few percent one way or another, which would change the date of this handover.  Second, the comparison between China and Japan is made by measuring the two economies in US dollars at market exchange rates.  Given that most people believe the Renmbini is undervalued relative to its fundamental value, in “fundamental” terms (if such a thing existed) China would have surpassed Japan earlier.

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