IMF Report: China will be the largest economy by 2016

An Honor Guard watches as a plane carrying Hu Jintao, President of the People's Republic of China, taxis at Andrews Air Force Base April 12, 2010 in Maryland.

STACEY VANEK SMITH: A report out from the International Monetary Fund says China's economy will surpass our in five years.

Marketwatch columnist Brett Arends says be very afraid. Good morning, Brett!

BRETT ARENDS: Good morning. Good to be here.

SMITH: How are they measuring this? How are they measuring the economies?

ARENDS: The IMF is looking at the size of the economies and they're looking essentially at how much it costs to buy goods and services. So in other words they're comparing the economies in real terms. China's economy in pure U.S. dollar terms is still much smaller than that of the U.S. But that is partly because the U.S. dollar is inherently overvalued on the currency markets. And the Chinese currency is massively undervalued. As a result, the difference saying that, "Oh, America's economy is still much bigger than China's" is a purely artificial one.

SMITH: So, 2016 seems really really soon. Is this sooner than we thought?

ARENDS: I think it's much sooner. You know, I don't think most people have really got their heads around the fact. I mean we have lived in the age of America for so long, there is of course no one alive who remembers anything else. And you know, our economy has dominated that of the world, really you could argue, since the 1880s. And we're going to enter a very different world. And we're entering it very quickly.

SMITH: So what does that mean if our economy's smaller? What is the take away? Does it matter?

ARENDS: Oh it matters enormously. Anyone who's a historian will tell you, the lesson of history is you cannot stay number one when you're economy is number two. It just don't work. Britain tried it, other countries have tried it in history. Everything follows, ultimately, from economics.

SMITH: Well, Brett we'll have to leave it right there, but Brett Arends is a columnist with Marketwatch. Brett thank you so much for speaking with us.

ARENDS: Thank you.

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