Today, we’re featuring a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and former member of the White House Council of Economic Advisers. A shorter version is published on Project Syndicate. Thanks to Sohaib Nasim for his excellent research assistance.
October 29, 2026 – Paul Krugman gave a talk last month at the ECB research conference where the subject was Geoeconomics, the weapon of economic power for geopolitical purposes. China’s ability to exclude trading partners from rare mineral exports is an example.
Krugman’s talk, titled “Economic Size and Economic Power,” rightly asserts that country size matters for geoeconomics. Canada, for example, has more to lose from breaking up trade with its larger neighbor, the United States, which can be expected to use measures to pressure the former. But I don’t buy Krugman’s way of comparing economic power between countries.
The US and Chinese governments measure their GDP monthly in dollars and yuan. To compare economic measures requires a decision on how to translate them into a common currency standard. The most frequently used conversion factor is the obvious one, the exchange rate. If China and the US are competing to put a naval base in the South Pacific island nation, it is the dollar against the yuan at the current exchange rate. But an alternative approach is the PPP measure of the real exchange rate which assumes that the prices of goods and services are lower in China. PPP price data on a basket of goods is collected at intervals of several years, by the International Comparison Program (ICP) of the World Bank.
The choice of conversion factor sounds like a small, very technical detail. But it makes a huge difference. “Who’s number 1?” Using the PPP conversion factor leads to the result that China exceeds the US in economic size in 2017. Krugman, among others, argues that the PPP rate is the correct way to compare GDP for geo-strategic purposes and thus concludes that China is now the largest economy in the world.
China surpassing the US has been repeatedly preached. But using the exchange rate conversion factor, which I like, it shows that the US remains ahead at 47%. In light of the recent peak of China’s population and the slowdown in its productivity growth, it now seems that China will not pass the US for many decades, if ever. This is even more true if someone thinks that China’s growth statistics are overstated.
While comparisons between the US and the EU do not carry the same geopolitical weight, Krugman considers it important to note that American productivity growth has outpaced European productivity performance, as he believes. According to standard measures, productivity has risen more in the US than in the EU since 2000. Many interpret this as evidence of a stronger social-safety net and European regulations, coupled with the failure to compete on the technological frontier, has damaged economic growth. The answer changes when comparing on a PPP basis, rather than using the nominal exchange rate. Adjusting for PPP, Krugman found productivity performance in the EU to be stronger than it first appeared, challenging the conclusion that the US offers a superior economic model.
The ICP collects data on absolute price levels, allowing comparisons of national incomes, only once every three to six years, usually released with a three-year delay. The latest relates to 2021. Previous surveys produced data for 1990, 2000, 2005, 2011, and 2017. In the years following each benchmark, the World Bank extrapolates with national government GDP statistics to produce annual estimates. The most recent benchmark survey available is for 2021. ICP has extrapolated annual estimates to 2023.
There is no question that the PPP rate is the correct approach, if one compares per capita income to achieve a country’s standard of living. But the economic power of computing is a different matter. Consider examples of weapons dependence such as the effectiveness of trade sanctions, financial sanctions, influence in international trade negotiations, weight in international bodies, or the influence of placing a naval base in a small Pacific island nation. Isn’t what matters is what the dollar and yuan can buy on the world stage, not the purchasing power at home in their respective domestic economies?
To maintain the superiority of the PPP comparison, Krugman relies on the observation that nominal exchange rates are highly volatile. “So one of the ways we can compare economies is the purchasing power of GDP. Now you can say why not just use the dollar value. And the answer is usually just instability. [from his presentation of September 2026].
Indeed, the volatility of the exchange rate complicates its use in comparing GDP. It seems wrong to compare the size of the country to fluctuations every year. But if that is the reason for the decision, one must recognize that the same criticism applies to the ranking based on PPP as well: In comparison ICP often changes radically when revised in the light of subsequent data.
ICP data for 2005 show rapid growth in China, as well as official extrapolation of preliminary reports with national GDP statistics; but real GDP was revised down to 40% in the next survey, in 2011. Next, the 2011 benchmarked data extrapolation is revised up by 21%, between the first release and the subsequent survey period. Then, the 2017 data was revised down by 16%. Finally, 2021 data, up 5%. The revision is greater than the annual fluctuation in the nominal exchange rate or in the GDP comparison that uses it. If people have relied on the ICP numbers before the 2011 data was released, one will be jolted when the new figures come in, to find that the number needs to be revised up 40%. These statistics are reported in the table below (online version):
Worse, sometimes the benchmark numbers themselves are revised. China’s 2005 PPP rate is published as 3.45 yuan per dollar. When the 2011 ICP came out, it was revised to 2.86, increasing China’s 2005 PPP by 20.5%. It is 21.8% above the original according to current data). So, the 2005 figure was first cut by 40% and then raised again by about 20%.
Similar findings apply to other Emerging Market countries. Revisions in Thailand’s GDP ICP, for example, are down 20% in 2005, up 43% in 2011, down 3% in 2017, and up 7% in 2021. The revisions to ICP estimates for advanced economies have been more reasonable. (In the case of EU members, Eurostat and OECD now conduct a new survey every three years, so revisions are smaller.)
The bottom line is that, for national GDP comparisons, it is not possible to use volatility to justify dispensing with exchange rate data in favor of PPP data that is less clear than the ICP. Two implications seem to follow. The US economy is still larger than China’s productivity growth and the US is still higher than Europe. Domestic political deviance is apparently not enough to overcome the natural advantages that the US has long enjoyed.
This article was written by Jeffrey Frankel.