The debate over whether to use nominal GDP or purchasing power parity (PPP) to compare China and US is dependent on the
context of the comparison. Both metrics offer valuable insights but serve distinct purposes.
Nominal GDP is valued at current exchange rates. USD remains the dominant currency for international trade and foreign reserves. In this context, nominal GDP reflects a country's ability to engage in USD denominated transactions, like global trade and its influence within that system. This affects China's ability to purchase oil, leading edge semiconductors, machine tools and making foreign investments. A lower exchange rate benefits China's ability to export to support industrial upgrading at the expense of lower ability to import, so it's a matter of balancing these 2 needs. It's also a more volatile metric due to exchange rates which might mislead about a country's actual productive capabilities. In the context of the global USD denominated trade system, US remains dominant.
PPP attempts to account for differences in price levels between countries. A poor nation is often not as poor in lifestyle as its nominal GDP may suggest as it's domestic services and products are priced much cheaper than in international markets. That being said
not all PPP are the same as each nation's domestic industrial ability varies. For example if we use PPP GDP as a proxy for national power it would appear the ratio between China and India is 2.3 instead of 4.6 in nominal terms. Yes, average Indian lifestyle isn't as bad as it's nominal may suggest as they have access to cheaper food, shelter, education, other domestic products and services but this only reflects what they can produce domestically. If we want to compare ability to produce modern weapons in a war economy, the difference between the two countries might actually be even larger than what nominal GDP suggests, in favor of China. The reason is the
composition of that GDP. Chinese economy's composition is heavy in manufacturing with a comprehensive and vertically integrated supply chain in mid-end technologies striving to do the same at the leading edge. In many areas it has about half of the world's productive capabilities, with weakness in a few high end industries. PPP is a good proxy of power based on what a country can produce domestically.
The Western mainstream media's coverage of the Ukraine war is an example misapplication of using nominal GDP to gage Russia's ability to wage war. While it's somewhat true Russian influence in the global marketplace is weakened and at the level of
, it doesn't reflect their ability to wage war. Russia has a vertically integrated and mature arms industry, producing at prices much cheaper than at international prices. They also have control over the raw material inputs.
than US and Europe combined (NATO). This is counter to what one might conclude if we just look at nominal GDP or even PPP, as it doesn't consider composition.
In a war economy, it matters what you can produce and how much of it you can produce. Money (nominal GDP) is only meaningful if you have access to the production, else it's meaningless. After the Cold War, the US gained access to the defense productive capabilities of most of the world's major advanced industrial nations so it's strength in nominal GDP directly translates into access to war time capabilities, even if it lacks the industries itself. In the example of India, it's sizable PPP isn't reflective of its war economy capabilities due to it's weakness in domestic industries, having to rely on imports which is affected by exchange rates. Due to economic composition, most nations don't have the ability to even effectively transition to a war economy by itself.
