What Is The Actual Gap Between The Economies Of U.S. and China?

Uncategorized Oct 08, 2019

A critical new perspective for you 

What is more American than being an entrepreneur? The frontier, it’s what America is all about. Business people and entrepreneurs are at the forefront of that frontier. Every day we have to deal with the complexity of the world and keep finding new profitable ways to solve problems. It is critical for us to keep up with fresh perspectives. It’s fine if you don’t… when times are good. But expect to hit a plateau and never achieve the next level ever again. God forbid if times aren’t so good and you become a casualty of time. There are no easy ways to increase the repertoire of one’s perspective, we have to keep reading about different perspectives and can’t be picky about what we are reading. We must build it one story at a time. This is one such story for you.

 

I would like to talk about the gap between the U.S. and China’s economies. What’s more complicated than the discrepancy between these two? And yet you couldn’t find simpler ways of looking at it on the internet, mainstream media included. I promise that after reading this you will feel that your understanding has grown an extra dimension. 

 

This isn’t just about China, it’s also about the US as well. US serves as a mirror to examine China just as how China is also a mirror to examine the US. Comparing China and the US not only furthers our understanding of China but also upgrades our understanding of the US to the next level as well.

The Gap, an overlook through GDP

China is almost approaching the United States’ status back in 1890, namely being the number one GDP in the world. So what is the actual gap between China and the U.S. in terms of their economy today?

 

Simply put, it’s too obvious. Just examine the GDP. In the ranking of 2017, the U.S. had $19 trillion, number one. China had $13 trillion, number two. Japan being number three only had $4.3 trillion dollars. Number one and two are far ahead of number three. Only U.S. and China are on the same order of magnitude. But the difference isn’t small. In fact, the difference of $6 trillion is larger than the number three GDP.

 

So how do we contend with these numbers then? Let’s start with an unfavorable view to China.

 

  1. The difference is actually very big. China’s economy was growing at 10% annually several years back. "Experts" projected that by 2020 China will have caught up to the U.S... But during recent years the growth rate declined to 6%-7%, so when will China catch up? Will China’s growth decline continually?
  2. China’s population is very big. The overall size of the economy is meaningless if we average it out per capita, then the difference is very vast. 

 

The curse of per capita

This is old news, every China's per capita metric lags behind western developed country by an order of magnitude if not several. China’s GDP per capita is only 1/7th of that of the US, but this is not the end of the analysis. Another thing we have to take into consideration is that Chinese are also way more industrious. Its labor participation is higher than that of the US, and the Chinese also work much longer hours than Americans. This means China’s labor productivity is 1/20th that of the US’s.

 

If we examine further in the details, education, health care, and etc. The U.S. average crushes China’s averages. China’s per capita education spending is less than 1/10th that of the US’s. Healthcare seems like an exaggeration, China’s average spending is 1/22th that of the US’s.  

 

Though China’s GDP is on the same order of magnitude as the US’s GDP, once you average it out the difference is now on different orders of magnitude. 

 

GDP called into question

Now, is that the final picture? There are at least two points worthy of consideration. 

Does the GDP metric really reflect reality?

Nevermind the Purchasing Power Paired GDP, which China already surpassed US back in 2014. Just by examining the calculation of GDP alone, there are many questionable areas. The US GDP included many economic activities that are not only none wealth-generating but also are adding to the national debt. In China’s case, it’s exactly the opposite.

Dissecting China’s GDP

A large swath of China’s economic activities were ignored by the GDP calculations. In 2016, 51.6% of China’s GDP is in services, which was very low when compared to other countries. Does that mean China’s services industry is underdeveloped? It does play a part, but many academics also pointed out that this is a technical issue. China’s accounting for the service industry is very lax. Many small scale businesses like cafes and restaurants’ data were unaccounted for. Business transactions in Taobao.com are tax-free, they too were not accounted for in GDP. And we know it’s a very big number.

 

Furthermore, a lot of China’s economic activities are investments, such as high-speed rails. Its investment is only counted toward GDP one time. But, things like infrastructure playout their usefulness continuously. Though they won’t appreciate and some times they might even lose value, but they did help increase wealth generation for many regions.

 

Dissecting US’s GDP

The quality of China’s GDP is quite different and cannot be taken at its pure numerical value. On the contrary, some of the US’s GDP are considered wasteful and even painful. Meaning after spending so much money there weren’t that many effects, and sometimes it even backfired. 

 

Electricity usage

For one, electricity usage. US’s per capita usage is 7.5 times that of China’s. Does that mean Americans are 7.5 times happier than the Chinese? Take the air conditioner for example. China and US are on similar latitudes. Their climates are similar. The spread of AC in China is almost the same as that of the US. Also in terms of spread in the usage of smartphones, PC, refrigerators and washing machines, China isn’t that far behind the US.

 

Then why such a big difference in electricity usage? A big contributor is waste. Americans have no habit of turning off lights and AC when not using them. Also, Americans use drying machines. Chinese hang dry their clothes. The U.S. has about 88 million drying machines. Each drying machine uses about 1079 kilowatt a year. Just the total electricity consumption for the drying machines along exceeds the annual generating capacity of the Three Gorges Dam. 

The use of the drying machine is more of a consumer preference, not much of an upgrade for the consumer experience. 

The curse of health care and legal

Let’s examine healthcare now. US’s per capita spending is 22.4 times that of China’s. On the surface, China’s spending on healthcare is very meager. But in reality, US’s healthcare is known internationally for its high cost, high price, but not that effective. US’s average life expectancy is 78 years, China’s average life expectancy is 76 years. It’s not that much higher. Even among developed nations, it’s pretty mediocre. 

 

What about law now? GDP from legal services in US is so high that litigation alone is about 2% of the GDP. China’s legal sector is only 1% that of US’s (in terms of lawyer’s income, about $7 billion) How do you view this difference? There is definitely lots of room for growth in China’s legal sector, $7 billion is clearly minuscule. But is US’s high level of legal spending a good thing?

 

Now we haven’t examined financial products, derivatives, derivatives of derivatives, transactions, and etc. These are interesting subjects for another time.

 

Examining China’s consumer’s consumption level.

China’s per capita consumption level lags pretty far behind internationally. But if you examine the details, you will find that in many areas China’s consumption level isn’t low at all. 

 

For every 10,000 Chinese, there are 203 car purchases. This level is already 2 times that of Taiwan. Of course, US is higher than China, by 2.5 times. But the difference isn’t as big as one would think. Per capita meat consumption for China is 59 kg a year, twice the world average. The US once again is twice of China. The difference isn’t that big. In terms of vegetable consumption, the Chinese average is already number one. In terms of Cloth, Food, Residential, Transportation (the big four in China, these are oftentimes bundled together in Chinese speak). China’s consumption level isn’t low at all. 

 

Of course, you might say China will soon catch up with the US. That also is not the reality. We must admit that China lags far behind in finance, university education, science, and global influences. The difference is several orders of magnitude. 

 

My point revealed

Then some might say, what is actually my point? Is the difference between US and China huge or minuscule?

 

This is what I actually wanted to address today. 

 

Humans always have this tendency. Whenever faced with an issue, we always want to get one clear conclusion. Why? To conserve cognitive bandwidth and brain energy consumption. The human brain’s evolution is driven by survival, not truth-finding, the faster and more efficient it is to arrive at a clear conclusion the better. 

 

As we can see on the internet, whenever it comes to the topic of the U.S. and China, the articles that attracted the most views will not fall out of these two categories. 

  1. China is no good, it is too far behind U.S.
  2. US is no good, China is surpassing.

 

This is also true in China’s public discourse as well (Are you surprised? Really I would like to know). Both these types of articles meshes with people’s emotional needs. They will all walk away with a conclusion they are satisfied with. Only this type of article can generate the largest traffic. This is true for any other topic with the potential for controversy.

 

On the contrary, the analysis of this article begets different conclusions when examining different details. It is ambiguous and no umph. 

 

Entrepreneurs deal with controversy all the time. Not being on the national public discourse doesn’t make it any less controversial for you. For people like you and me, only articles like this one are worthy of our time. Why? Because we are not in a hurry to arrive at a conclusion. We are more interested in new perspectives to view an issue that is masked by a simple conclusion. To become a better entrepreneur and a business person, we have to understand this world better. In our journey to betterment there are many concepts like GDP, not only do we have to use it well, we should be able to circumvent it. This is the correct way of independent thinking and only then can we gain insight and have cognition, and achieve our businesses to the next level.

 

- Yuan Qu | China Observer

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