Serious question. In your opinions, dear readers, which is a more accurate measure of an economy: nominal GDP or purchasing power parity? I lean towards PPP myself, as I’ve traveled so much (65 nations and counting) I’ve internalized what the local value of a currency can buy versus what a dollar can by at home. So, I can mentally compare. It just makes more sense than this amorphous nominal GDP. Am I wrong?
Nota bene: Measured by nominal GDP the USA is 25% of the global economy. But, measured by PPP it is 15%. PPP makes more sense.
j
It depends on what is the purpose of measuring the economy.
If you think that the economy exists to make life better for the people, then GDP for something like the USA is a worthless measure. The US economy is mostly just the stock market, and that is at best a net zero for the people living there. Even the economy that is not the stock market is not out there to make anyone’s life better – to the contrary, really.
For 50’s US, I’d guess GDP was a pretty good measure though.
But purchase power is a better one indeed.
The good ol’ quote – the US is rich, Europe is wealthy. What’s the point of all the riches in the US, if they cannot afford vactions, healthcare, education, housing, and now – eggs even. It’s a sham.
Bhutan I hear is governing based on a happiness index. Finland also ranks it the top in happiness, but also – on suicides. So I guess my point is – there’s no silver bullet, you gotta look at it from multiple angles.
cc
Isn’t the US nominal GDP a hugely artificially-inflated Ponzi scheme Madoff-esque number? Stock markets that long ago lost ties to any pretense of semblance of reality. Deficit spending on hugely expensive ineffective military equipment designed for “shattering to pieces” (Orwell, “1984”) in order to recurringly boost nominal GDP. Inflating the cost of everything to inflate away the unpayable debt but boost nominal GDP. Imposing trade barriers and tariffs to further inflate costs and boost nominal GDP. American AI that’s 10-20 times more expensive to run, and loses money on every single prompt made (including by paying users), but boosts US nominal GDP. Ridiculous tuition costs, medical costs, pharmaceutical costs, student loans, car loans, mortgages, rising rents, etc. all go toward boosting US nominal GDP.
Feral Finster
Depends on what cost you are trying to measure – goods at home, goods from abroad, goods exported abroad.
If a country is a total autarky, PPP is a perfectly accurate measure. Since not even North Korea is an autarky, on some level one has to take GDP (which reflects what one can buy) into account.
Sean Paul Kelley
A few years ago the EU began adding prostitution and drug trafficking to its nominal GDP numbers. That’s simply outrageous. https://www.europarl.europa.eu/doceo/document/E-8-2014-006360_EN.html
Jorge
The amount of diesel burned is a good proxy for the Industrial GDP. If you care about real life, and the ability to fight a war, this is the GDP that matters.
Purple Library Guy
@Jorge I’d want to include the amount of electricity generated. Especially since while amount of diesel burned is probably still a decent measure TODAY, I’m not so sure about five years from now, and I prefer my measures to have at least SOME longevity.
I’m more of a PPP type, but I think the issue Feral Finster raises is real. Although . . . I’m not sure how PPP is calculated. If it does basket-of-goods stuff, then if some of the basket is stuff the country imports, then the purchasing power includes the power to purchase imports and the trade issue is sort of built in to the measure, yeah?
Jessica
Either way, raw numbers or PPP, only measures exchange value not use value. (What something fetches in the market versus how useful it actually is)
I would say that the percentage of exchange value in the US that represents genuine use value has decreased a great deal. Much of the creative energy in American business in recent decades has been devoted to extracting exchange value while creating little or even negative use value. (For example, the fees extracted unjustly seizing someone’s house)
Poul
I would go with nominal numbers and then supply more numbers like PPP to create the necessary nuance. PPP are artificial numbers with human assumptions built into them. Human assumptions are flawed.
PPP is just an attempt to create comparable numbers between countries. It has big problems if the economies compared has too big differences in tax structure etc.
Just as the conversion into US dollars creates problems as the value of the US dollar fluctuates. An over-valued US dollar makes the US economy look better than it is. Ditto China’s suppression of their currency make the Chinese economy look weaker.
Take fx. Egypt
Nominal GDP per Capita in 2024 is $ 4.137
https://tradingeconomics.com/egypt/gdp-per-capita
PPP GDP per Capita in 2024 is $ 16.798
https://tradingeconomics.com/egypt/gdp-per-capita-ppp
That means Egypt goes from being a low-income country in nominal dollars and becomes a middle-income country using PPP. What is the most correct numbers. If you have been to Egypt it is the nominal numbers. Egypt is not a middle-income country.
Using just one number as the Holy Grail is IMO a incorrect approach to compared economies.
Carborundum
Cynically, the more accurate measure of an economy is whichever one helps one win the Intertubes debate of the day.
More rationally, I don’t honestly find either aggregate measure stupendously useful. I mainly use GDP internally, in conjunction with other measures, to understand the structure and composition of an economy. That’s a lot more useful for not that much extra effort, though I haven’t tried to apply it in other than a handful of fairly developed and well instrumented economies (not a development guy).
The process is indeed to generate estimates of nominal GDP and then apply “basket of goods” derived conversion factors and, yes, these factors are materially affected by whether goods are imported or produced domestically. Significantly, if one has issues with how GDP estimates are conceived and constructed, they are quite likely to carry over to PPP-denominated estimates.