Is the US still ahead of Chinese manufacturing?

Some economists say it is, but they're using the wrong metrics.

By , Guest blogger

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    An employee installs tire rims at a factory of Zhengxing Wheel Group Co. Ltd in Hefei, Anhui province in China on January 20. Guest blogger Stefan Karlsson writes that even though China's GDP is lower than the US's, it has surpassed the US in manufacturing.
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Mark Perry, Scott Sumner and some other economists have recently linked to this article by Boston Globe columnist Jeff Jacoby, where he claims that a UN database shows that the value of U.S. manufacturing is still (or more correctly was still in 2009) larger than the value of manufacturing in China.

This would strike you as odd, considering that you can for example see news of how China is the by far biggest consumer of copper and other industrial metals as well as oil and coal and how Chinese car sales and sales of other durable consumer goods as well as Chinese goods exports are greater than in the United States.

And if you look at the U.N. statistics page, you can see that at current exchange rates, the value of manufacturing in China was $2.05 trillion, more than the $1.78 trillion value of U.S. manufacturing.

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Jacoby seems to have gotten his numbers by looking at the alternative indicator of "constant 2005 U.S. dollars". But the problem with using this indicator is that it overlooks the massive real appreciation of the Chinese yuan during this period, especially with regard to the manufacturing sector. And as I pointed out a few days ago, when comparing economic might, it is the value at current exchange rates which is relevant.

And if you were to look at [domestic] purchasing power adjusted numbers in a consistent way, China's superiority would be even greater because the general price level in China is still much lower than in the U.S.

The indicator "constant 2005 U.S. dollars" makes no sense at all in this context since it by using a past real exchange rate will neither reflect domestic purchasing power nor economic might (international purchasing power).

While the overall GDP of the U.S. remains higher than in China, and probably will continue to do so for about a decade, because its service sector is much greater than China's, China has in fact surpassed the United States in manufacturing. Jacoby's use of an irrelevant indicator could perhaps be excused by the fact that he isn't an economist (though that would raise the question of why he writes about economic issues), but Perry and others don't have that excuse.

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