Comparing Economies of Key Countries Using Purchasing Power Parity

by: Richard Shaw

It is useful to have a ready yardstick for comparing the economy of key countries when making international or country specific investment decisions. The following three charts present data about the top 15 countries in terms of the Purchasing Power Parity of their GDP in 2005 as estimated by the United States Central Intelligence Agency.

Purchasing Power Parity [PPP] essentially adjusts the size of economies not based on the exchange rate for currencies, but based on the costs of a spectrum of goods and services within the country. PPP is less accurate than exchange rate measures, because it uses a sampling method, but is a better indicator of economic prosperity inside each country than an exchange rate based comparison of GDPs.

These data will tell many different stories depending on who is looking at them and why they are looking at them. We won’t try to say which stories are most important, because the most important story is the one they tell to you based on the issues you are weighing. The permutations of possible observations and relationships are many.

2005 World GDP Share

For us there was no surprise to see that China and India lead the pack in growth rate of PPP GDP, but we were a bit surprised to learn how high they ranked in total national PPP GDP. On an exchange rate based GDP comparison, for example, we have read that China’s economy is #4 behind the U.S.A, Japan and Germany. However, on a purchasing power basis, Germany and the UK are not only behind China but also behind India.

Russia is ahead of both Brazil and Canada in national PPP GDP and in the rate of growth of GDP, but we would probably prefer to invest in Canada for energy resources and in Brazil for emerging market exposure due to Russia’s bad behavior relative to private property in the last few years. We’d rather take the populist and inflationary risks in Brazil than risk the re-nationalization trends in Putin’s Russia.

2005 Real GDP Growth Rate

The great gap between the per capita PPP GDP of the BRIC countries (Brazil, India Russia and China) and the per capital levels of the developed countries, taken in combination with the rapid growth rates of the GDPs of the BRIC countries, bodes well for world economic growth – short of a major global military shock which would put everything into a cocked hat.

With China as a former enemy and a possible future adversary, we are personally worried about the degree to which our strategic manufacturing may be outsourced to them, but on an investment level we see India as far less likely to be an enemy and far more likely to be an ally, making them a potentially safer bet in the event of a global military problem.

2005 Per Capital GDP

In terms of risks of asset confiscation, we see India as more based on the rule of law and respect for contracts and private property than China and particularly Russia.

India is slower in opening its economy than China and Russia, but is not confiscating investors’ assets as they are doing in Russia, and has a legal system more similar to ours for the protection of investors.

We have great personal concerns about geopolitical risks to energy security for the U.S.A. which causes us as investors to favor energy resources that are located domestically or in countries where our energy trade relationships are not fundamentally in question (Canada and Mexico on these charts, plus Australia, and maybe Brazil for ethanol).

Overall, for us, given our political risk concerns and the growth charts above, we would tend to lean more toward India and Brazil and less toward China and Russia. The charts may tell you a different story.