Originally Posted by theplains
The answer is simple. The words, "I exalted you above all the peoples" does not refer to Israelites being exalted above everyone else for all times to come in the future. It only meant they were exalted above everyone else in their own respective time. The proof for this is in verse 3:33 "Allah did choose Adam and Noah and the family of Abraham and the family of 'Imran above all peoples." Thus, the meaning of the Israelites being preferred over everyone else only refers to their own age.
The family of Jacob was not given a line of Prophethood that would end in the Khatam an-Nabiyeen, where the Seal of Prophethood would be given and the final law would be established. Evidently, the Jews only had Prophets sent to their own nation, and not to others. While us Muslims, the line of Ishmael (as), have a line which ended in the highest pinnacle of Prophethood, which can never be reached by any other Prophet of Allah. Therefore, Allah had reserved this high status for the line of Ishmael (as).
Furthermore, the line of Jacob (as) was preferred over other people for their time, because Allah had ordained prophethood to be with them for their own nation. The Arabs who lived in the area the Holy Prophet Muhammad (saw) was raised never had a Prophet come to them before, so they were in need of a Prophet. This is why Ishmael (as) had a line which would have Prophethood come to them later on. In fact, many Jews moved to Arabia knowing a Prophet would be raised there in the future. The Qur'an mentions this often, but the Jews did not like the fact that this final Prophet was an Arab and not a Jew. Hence, they opposed him bitterly for that and they hid their prophecies and turned them into something else for people to wait for rather than accept the Seal of the Prophets (saw).
Therefore, the children of Jacob (as) were never preferred over the children of Ishmael (as). Allah preferred the latter over the former because the gift of Prophethood was taken away from the Jews and given over to the Arabs - the descendants of Ishmael (as). The Jews lost their Prophethood with Jesus (as). This is why no Prophet came in between Jesus (as) and the Holy Prophet Muhammad (saw), because the Jews lost their prestige when they tried to crucify Jesus (as), a noble, innocent and pious Prophet of Allah who did not wrong to anybody.
If one does not look at the full historical situation and ignores what happened taking only one time period into consideration, then the question becomes confused. However, if you consider that the Jews had no more Prophets for the last 2000 years, while we Muslims had one 1400 years ago, then it puts things into perspective. Obviously, the line of Jacob (as) is not the most favored right now. however, the same religion continues, and all of those past Prophets, had they been alive at the time of the Holy Prophet (saw), would have given allegiance to him because they all took a covenant saying that they would follow the Prophet who came after them - especially the Seal of the Prophets (saw), for he is the pinnacle of the Prophets.
Also, the Holy Land in Jerusalem may have been given over to the Jews, but the Holy Land of the Ka'ba is given over to the Muslims. The Ka'ba was built by Adam (as) first, then later by Abraham (as) with his son. Thus, the custodians of the Ka'ba are given the Holy Land that was holy since the beginning of time. This is much more significant than Jerusalem. Just look at all the wealth flowing from the land of Arabia. And how worthy of the very land that the holy steps of the Seal of the Prophets (saw) touched, and was thus blessed with such wealth that it has made deserts turn into gardens.
All in all, the Israelite line was the most exalted people of their own time, not forever. Their message was not meant to be exalted over all times since Allah did not state that the Bible would be the law for all mankind, the Qur'an is. The Qur'an remains the law until the Day of Judgement, thus it will remain supreme forever, and that makes it's followers and custodians the most exalted peoples on earth because they hold and practice the most exalted law on earth. This law abrogated all past laws, so no previous faith can claim superiority to the faith of Islam, pristine, pure and unchanged. The Bible changed, but the Qur'an remains the same. How can the most exalted nation on earth possibly be the best of all peoples when their book has changed? Only the faith with an unchanged Book till the end of time can claim superiority, and that faith is Islam.
I hope this clarifies the matter for you. Should you have anymore concerns after the proofs I have set out for you, then feel free to refer to other verses of the Holy Qur'an and anyone else who has read the Qur'an can explain it to you. I may not have given explicit references here, but all of my information can from various verses of the Holy Qur'an. It is late for me now, but next time Inshallah I will try my best to quote the actual verses I am referring to in my explanations.