Largest Economies in the World

Why China Is the Largest, Even Though Some Say It's the U.S.

A customer purchases goods at a supermarket in Huaibei, Anhui Province of China.

 Photo by VCG / Getty Images

For the fourth year in a row, China was the world's largest economy as of 2018. It contributed 25.3 trillion, or 18.7%, of the world's 135.4 trillion in total gross domestic product, according to estimates by the International Monetary Fund, which uses so-called international dollars to make better comparisons between countries.

The European Union was in second place, contributing 22 trillion, or 16.3%, of world GDP. The U.S. remained No. 3, with 20.6 trillion, or a 15.2% share. The three combined represented 50% of the world economy.

Why Some Say the U.S. is No. 1

The above figures account for purchasing power parity (PPP) exchange rates, which relate the exchange rate between currencies to consumer price levels. However, the U.S. is the biggest when measured by nominal, unadjusted GDP. (More on this under 'Rankings by Nominal GDP' below.)

No other economy is even close to the top three. The fourth-largest in 2018 was India, representing 7.74% of adjusted GDP, and Japan was fifth, with 4.13% of adjusted GDP. Germany, the largest economy in the EU, contributed 3.21%.

China has been the world's largest economy since 2015, when it took the top spot from the EU. Still, China's growth rate has slowed to single digits as its leaders attempt to head off an asset bubble through reform. So it's unlikely that the Chinese yuan will replace the dollar as the world's reserve currency anytime soon. The dollar is buoyed by the power of the U.S. economy.

GDP has four components: output by households, government, business investment, as well as net exports (exports minus imports).

PPP takes into account the cost of living by reflecting how much the currency of one country needs to be converted to another to ensure that the first currency can buy the same amount of goods and services as the second country. It's the reason the Economist's Big Mac Index shows what a Big Mac costs in 48 countries.

Outlook for the Future

The IMF estimates how much the world's economy will grow over the next five years, and who will contribute the most. By 2024, China's share is expected to grow to 21.4% of the world's economy, while the contribution from the EU and the U.S. will dip to 14.6% and 13.9%, respectively.

Projected Share of World's 5 Largest Economies

Economy    2018     2024
China 18.7%   21.4%
EU 16.3%   14.6%
U.S. 15.2%   13.9%
India 7.74%   9.58%
Japan 4.13%    3.5%

Should the EU Be Counted as an Economy?

Even though the EU produces more, some experts say the U.S. is still a larger economy. They argue that the U.S. is a country while the EU is just a trading area that includes 28 separate member countries.

But the EU confers many rights that make it more than just a free trade zone such as the North American Free Trade Agreement. In addition to tariff relief, the EU allows free movement between the countries for employment and commerce. Furthermore, 19 of these countries share a common currency, the euro.

Despite the eurozone debt crisis, the EU is lurching toward greater fiscal integration as well as a monetary one. The EU is acting more and more like a unified economy all the time. Furthermore, the EU's currency, the euro, has successfully competed with the dollar as a global currency.

The EU has achieved an economy of scale that eats into the comparative advantage the U.S. has traditionally enjoyed.

Rankings by Nominal GDP

Here are the 2018 rankings by nominal GDP, shown in U.S. dollars. These don't take into account PPP, and by this measure, the U.S. has remained the world's biggest economy:

  1. U.S.: $20.6 trillion
  2. EU: $18.7 trillion
  3. China: $13.4 trillion
  4. Japan: $4.97 trillion
  5. Germany: $3.95 trillion
  6. U.K: $2.83 trillion
  7. France: $2.78 trillion
  8. India: $2.72 trillion
  9. Italy: $2.08 trillion
  10. Brazil: $1.87 trillion

Instead of PPP, these calculations use the official exchange rate. Unlike PPP, the official exchange rate doesn't account for changes in the rate over time. It also doesn't compensate for government manipulation of exchange rates. PPP takes these variances into account, giving a more realistic picture.

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Article Sources

  1. International Monetary Fund. “GDP Based on PPP, Share of the World.” Accessed March 17, 2020.

  2. Bureau of Economic Analysis. "What Is GDP?" Accessed March 17, 2020.

  3. International Monetary Fund. "Frequently Asked Questions." See 'What Is a Purchasing-Power-Parity (PPP) Exchange Rate'? Accessed March 17, 2020.

  4. European Parliament. "Free Movement of Workers." Accessed March 17, 2020.

  5. International Money Fund. "GDP, Current Prices." Accessed March 17, 2020.