Guest Contribution: “Europe, the US, and China: Comparing Geoeconomic Size”

In a recent talk at an ECB research conference, Paul Krugman emphasized that a country's size plays a crucial role in its geoeconomic power. He used the example of China's ability to cut off trading partners from its exports of rare earth minerals to illustrate this point. However, the method Krugman used to compare economic power across countries is not without flaws.

Krugman and others argue that PPP conversion factors should be used to compare GDPs for geostrategic purposes. According to this approach, China surpassed the US in economic size in 2017. However, using the exchange rate conversion factor, which the author believes is more appropriate, suggests that the US is still ahead by 47%.

This discrepancy in the comparison between the US and the EU highlights a different issue. The author notes that Krugman considers the comparison between these two regions significant when determining whether American productivity growth has surpassed European productivity. However, when comparing on a PPP basis, the author finds that productivity performance in the EU is stronger than it initially appears.

The International Comparison Program (ICP) at the World Bank collects data on absolute price levels at multi-year intervals, which allows for the comparison of countries' incomes. However, this data is released with a three-year lag and is extrapolated by World Bank using national governments' GDP statistics to produce annual estimates. The most recent available benchmark survey pertains to 2021, with extrapolations up to 2023.

While the volatility of exchange rates does complicate their use in comparing GDPs, the author argues that PPP-based rankings can change substantially upon revision in light of subsequent data. This revision could result in a significantly different comparison between countries' economic power.