What Is the World's Largest Economy?

The 2016 Winner Is (the Envelope Please) China!

••• China replaced the United States as the world's largest economy in 2014. Photo: Peter Dazeley/Getty Images

In 2016, China was the world's largest economy for the second year in a row. It produced $21.3 trillion in economic output. The European Union was in second place, generating $19.2 trillion. Together, China and the EU generate 33.9 percent of the world's economic output of $119.4 trillion.

The United States fell to third place, producing $18.6 trillion. The world's three largest economies combined produced $59 trillion.

That's almost half of the world's total economy. No other economy is even close to any of these three. The fourth largest economy was India, producing $8.7 trillion. Japan was fifth, at $4.9 trillion. Germany, the strongest country in the EU, produced $3.9 trillion. (Source: "Rank Order GDP," CIA World Factbook.)

How Economies Are Measured

Don't start swapping U.S. dollars for Chinese yuan and learning Mandarin yet. These three figures are very close. The estimates change throughout the year. China's economy is slowing as its leaders attempt to head off an asset bubble through reform. That's why it's unlikely that the yuan could replace the dollar as the world's reserve currency anytime soon.

Second, it's important to understand how gross domestic product measures a country's economy. That has four components: output by households, government, and business investment, as well as net exports (exports minus imports).

The output measured by GDP equals spending, so it takes into account the cost of living. That means it doesn't cost as much to buy, say, a Big Mac in China as in the United States. Analysts use purchasing power parity to take into account each country's standard of living. You can't compare countries or economies without it.

Expect to see the three global giants continue to trade places in the No.1 spot for years to come. That's because of the power of the U.S. economy.

How the Recession Affected the Global Ranking

The EU achieved its top status in 2007. That year, its GDP was $14.4 trillion, while U.S. GDP was only $13.86 trillion. The EU held onto its premier position through the 2008 financial crisis and the eurozone debt crisis until 2013, when the United States briefly regained the top spot. (Source: "Rank Order GDP," CIA World Factbook.)

While the EU and U.S. economies maintained their share of the global economic output, China was the big winner. It now produces three times as much as in 2007 when its GDP was $7 trillion. India is also a big winner. Its GDP also nearly tripled from its 2007 output of $2.9 trillion. Japan barely gained any ground Its GDP was $4 trillion in 2007. Germany's GDP rose 32 percent from its $2.8 trillion output in 2007. 

Should the EU Ever Be Considered the World's Largest Economy?

Even when the EU produced more, some experts said the United States was still the world's largest economy. They argued that America is a country while the EU is just a trading area that includes 27 separate countries.

But the EU confers many rights that make it more than just a free trade zone, such as NAFTA. In addition to tariff relief, the EU allows free movement between the countries for employment and commerce. Furthermore, 13 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.

The U.S. economy grew more slowly than the EU. The eurozone crisis changed all that. Many analysts initially said that the EU "experiment" was doomed to failure since these vastly different countries could never work together as a unified economy. The ongoing eurozone crisis may yet prove them right. Until then, the EU experience was so successful that areas such as Southeast Asia and Latin America were considering unifying their economies and using a unified currency.

They are waiting to see how the eurozone crisis resolves before following that model.

Nevertheless, the EU has achieved an economy of scale that eats into the comparative advantage the United States has traditionally enjoyed. Furthermore, the EU's currency, the euro, has successfully competed with the dollar as a global currency. Thanks to these competitive pressures, and those from China, the United States has once again lost its No. 1 spot as the world's largest economy.