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May 31, 2006

Hamburger economics and China's economy

The Economist magazine uses the McDonald's Big Mac as a simple proxy for the purchasing power parity exchange rate. If this accurately reflects what the long term exchange rate should be in 10-20 years, then Chinese Yuan should eventually convert at 3.39 yuan to the US dollar instead of 8.0 where it currently is. Applying the implied conversion rate to the expected 2006 GDP of China (2.53 trillion for 2006) then China would have a PPP GDP of 5.97 trillion. In 11 years if that was the exchange rate and assuming 8% annual growth, China would catch up to the size of todays US economy. It would take China about 17 years to pass the US economy if its growth was 5% per year greater. (say 8% versus 3%) Assuming that China's growth advantage remains at 4-6% per year and the long term shift in exchange rates then the Chinese economy would pass the US between 2021 and 2027.

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