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NewsMaterial4 min readDisconfirmAI Editorial

Harvard Professor Jeffrey Frankel: Purchasing Power Parity Is Unsuitable for Measuring Economic Power, ICP Data Revisions Far Exceed Exchange Rate Fluctuations

Harvard Kennedy School professor Jeffrey Frankel argues in an EconBrowser article against Paul Krugman's preference for PPP. He points out that geopolitical economic power should be measured by a currency's purchasing power in international markets rather than domestic purchasing power, and notes that World Bank International Comparison Program (ICP) PPP data undergoes revisions of up to 40% between baseline surveys, with fluctuations far exceeding the annual changes in exchange rates themselves.

2026-10-29 08:28 GMT+8

When comparing the economic scales of the United States and China, the choice between using purchasing power parity (PPP) or market exchange rates directly determines which country is ranked number one in the world. Under the PPP metric, China surpassed the United States in 2017; under the exchange rate metric, the US economy remains 47% larger than China's. Harvard Kennedy School professor Jeffrey Frankel wrote an article on EconBrowser explicitly opposing economist Paul Krugman's advocacy for prioritizing PPP, arguing that exchange rates are a more reliable tool for measuring geopolitical economic power.

Frankel's first line of argument targets the essence of economic power. He contends that a nation's economic power is manifested in its ability to impose trade sanctions, financial sanctions, gain leverage in international negotiations, or build military bases in Pacific island nations. These actions all take place in international markets, where the key factor is how much foreign assets a currency can purchase at the exchange rate, not how many goods it can buy domestically. China's capacity to mobilize resources on the global stage depends on the market exchange rate of the renminbi against the US dollar, rather than its domestic purchasing power adjusted for PPP.

Frankel's second line of argument is more technical. Krugman's primary defense of PPP is that exchange rate volatility is too high to make suitable cross-year comparisons. Frankel acknowledges this point but immediately follows up by noting that the revision magnitude of PPP data from the World Bank's International Comparison Program (ICP) actually far exceeds the annual volatility of exchange rates. He cites specific figures: the 2005 baseline data was revised downward by 40% during the 2011 survey; the extrapolated values based on the 2011 baseline were revised upward by 21% in subsequent surveys; the 2017 data was revised downward by 16%; and the 2021 data was revised upward by 5%. These revision magnitudes are substantially larger than the annual fluctuations in nominal exchange rates.

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More unsettlingly, the baseline data itself is subject to modification. China's 2005 PPP exchange rate was initially published as 3.45 yuan per US dollar, but was revised to 2.86 yuan upon the release of the 2011 ICP data, raising China's 2005 PPP GDP by 20.5%; according to current data, this figure remains 21.8% higher than the original estimate. Thailand experienced a similar pattern: a 20% downward revision in 2005, a 43% upward revision in 2011, a 3% downward revision in 2017, and a 7% upward revision in 2021. In contrast, ICP revisions for advanced economies are much smaller because EU member states conduct new surveys every three years through Eurostat and the OECD.

Frankel concludes that if the sole reason for choosing PPP is exchange rate volatility, then the same criticism applies equally—and even more severely—to PPP data. For comparisons of national economic scale—especially those involving geopolitical power—exchange rates remain the more reliable choice. This implies that the US economy is still significantly larger than China's, and that US productivity growth continues to lead Europe's. Frankel also admits that PPP is the correct tool for comparing per capita income and living standards; his opposition is limited strictly to the specific purpose of measuring economic power.

This argument has its boundaries. The 47% gap under the exchange rate metric is itself influenced by exchange rate cycles: the figure widens when the US dollar strengthens and narrows when the renminbi appreciates. Furthermore, exchange rate fluctuations are continuous and observable in real-time, whereas ICP revisions are discrete and occur in concentrated bursts only once every three to six years; there is a structural difference in frequency and predictability between the two. Even though the revision magnitude is larger, whether policymakers are willing to accept a baseline dataset updated only once every few years versus a sequence of exchange rates observable daily remains a distinct practical issue. Frankel's argument holds logically—that excluding exchange rates due to volatility while accepting the even more volatile PPP is inconsistent—but readers should note that this conclusion relies on directly comparing the magnitudes of two fundamentally different types of instability.

Sources

  • econbrowser.com↗
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