When asked what are some of the largest economies in the world, many people are able to name the first two: the United States and China. However, after that, it is less known.
The Largest Economies in the World by GDP
- United States ($21.44 trillion)
- China ($14.14 trillion)
- Japan ($5.15 trillion)
- Germany ($3.86 trillion)
- India ($2.94 trillion)
- United Kingdom ($2.83 trillion)
- France ($2.71 trillion)
- Italy ($1.99 trillion)
- Brazil ($1.85 trillion)
- Canada ($1.73 trillion)
- Russia ($1.64 trillion)
- South Korea ($1.63 trillion)
- Spain ($1.4 trillion)
- Australia ($1.38 trillion)
- Mexico ($1.22 trillion)
What is GDP?
GDP, or Gross Domestic Product, is the value of all goods and services produced in a country over a period of time. Put another way, it is the amount of money generated by an entire country over a specified period of time. These numbers are always market value, meaning it is NOT adjusted for inflation. This is called Nominal GDP.
Economists measure the health of a country’s economy by using GDP. Year over year GDP growth rates give great insight into how economies change over time.
Largest Economies in the World by GDP (PPP)
The above economies are grouped by Nominal GDP. Nominal GDP is a way to measure the largest economies in the world through their total income in the entire economy. As noted above, the United States is still the largest economy in the world. However, China is a relative close second, and Japan is trailing as third. However, there are discrepancies in how economists measure the world’s economies.
Nominal GDP, put simply, is an absolute standard measure of GDP. It adds up all of a country’s income and reports that number. GDP PPP, or Purchasing Power Parity, however adjusts for difference in local prices and costs of living. Purchasing power in countries wildly differ, and this affects how the worlds’ economies are ranked.
The Largest Economies in the World by GDP (PPP)
- China ($29.47 trillion)
- United States ($22.32 trillion)
- India ($12.36 trillion)
When compared to the first list, the top 3 looks very different. China’s GDP doubles by changing the method used, and the United States falls to the number 2 spot. India also jumps from 5th largest economy to 3rd largest. Their GDP increases four times over just from using the PPP method instead of nominal GDP. Both of these methods are used for different reasons, however is one better than the other?
The Problem with GDP (PPP)
There are entire economic journals written about the problems with using Purchasing Power Parity as a measure of GDP. In fact, many economists do not want to use this method with any economic measures. Without getting into complicated economic theory, the reason that PPP is criticized is that it exponentially increases GDP from countries with the highest inequality. While income inequality is often a political topic in the United States, it pales in comparison the income inequality of other top economies.
According to USA Today, China ranks number 2 for the widest gap between rich and poor. India is right behind China at number 3. Meanwhile the US is ranked number 9 in the world. While it is not a great position for the United States, it is far better than China and India. This inequality is why their GDP PPP is far higher than nominal, and it should not be used as an authoritative ranking on economy.
Fastest Growing Economies in the World
- Rwanda (7.7%)
- Bangaldesh (7.5%)
- Senegal (7.3%)
- Ethiopia (7.0%)
- Myanmar (6.8%)
When listing out the fastest growing economies in the world, the list looks quite different. Unlike the largest economies in the world, the above 5 countries all have very young economies. The United States, Japan, and even China all have mature economies. When an economy matures, its growth begins to slow. The first stages of an economic system grow very fast, however they are also unstable. Below is great infographic showing the different “seasons” of an economy
Countries like Rwanda and others listed above have suffered from years of political and economic turmoil. Since their economies are essentially starting from zero, they have the opportunity to explode with growth. Also, many international investors, with an appetite for more return, looking to the developing world for investment opportunities. While it is risky, the return from these developing economies is enough to encourage international investment, thus boosting the economy even more. (Joe has written a great article about the risk of Options- which you can find here).
That being said, these countries have a long way to grow. Rwanda, for example, had a Nominal GDP of only $11 billion in 2019. This is double from their 2010 Nominal GDP of around $6 billion. However, they have a long way to go if they want to compete with some of the largest economies in the world.
In short, the world is always shifting. Economies expand and contract, countries rise and fall. The story of the past two decades has been around China’s rapid race to world economic dominance, however cracks are starting to show. Many suggest economic growth on China’s scale is unsustainable- others are now politically inclined to reduce economic ties with China due to nationalism and protectionism, or because of the Chinese Communist Party’s human rights violations. Either way, the world is always changing.
What will the largest economies be in 2030? It is difficult to say. If trends continue, China may overtake the United States and claim the top spot. The Americans, though, shouldn’t be counted out just yet. The USA is still home to the largest companies in the world, and the most innovative. A free democracy will always be more attractive to conduct business in over an authoritarian dictatorship like China. It is for these reasons that the US may yet pull ahead of China over the next ten years.
Either way, in October 2030, expect an article on foureyesfinance.com revisiting this topic, and we will see whether these predictions are correct.
- Investopedia.com. “https://www.investopedia.com/insights/worlds-top-economies“
- Howmuch.net. “https://howmuch.net/articles/worlds-biggest-economies-over-time“
- Usatoday.com. “https://www.usatoday.com/story/money/2019/05/28/countries-with-the-widest-gaps-between-rich-and-poor/39510157“
- Focus-economics.com “https://www.focus-economics.com/blog/fastest-growing-economies-in-the-world“
- Jobmarketmonitor.com “https://jobmarketmonitor.com/2014/08/05/the-seasons-of-economic-cycle-in-us-infographic/“