by Jurgen Brauer and Nick Anglewicz, December 2004
Copyright: J. Brauer. No reproduction without permission.

Americans love rankings. Who is the best athlete? What is the best movie? Who is the best dressed? Often we rank objects or people based on first, second, and third or gold, silver, and bronze. We are constantly reminded by our media and politicians that our country is the best, "number one," "the greatest." Rarely does the average American consider who may be snapping at our heels, who is number two or three.

On the economic leader board, gold, silver, and bronze go to the U.S., Japan, and Germany. But in 2008, they will go to the U.S., China, and India!

For example, on the economic leader board the most common indicator of economic heft is gross domestic product (GDP), a measure of the total value of goods and services, or income, produced domestically, i.e., within a country. According to this measure, in 2003 the U.S. was the world's number one economy followed by Japan and Germany. This matches most people's impression: the economic gold, silver, and bronze go to the U.S., Japan, and Germany, in that order.

One problem with this ranking is that economists have largely abandoned GDP for better measures. For example, unlike GDP, gross national income (GNI) measures the income produced by all of a country's private and corporate citizens, both inside and outside the country. For some countries the difference is clear. Egypt for instance provides many migrant workers to the oil-fields of the Middle East. Thus, income earned by Egyptians outside Egypt is large, and Egypt's GNI correspondingly exceeds its GDP. Egypt should move up in the economic rankings.

But there is another problem, one that affects both GDP and GNI. It is that in order to compare countries' economies, one needs to convert their GDP (or GNI) into a common currency. After all, to say that the U.S., Japan, and Germany are numbers one, two, and three requires us to compare economies operating in dollar, yen, and euros. For example, one euro's worth of income in Germany might be equivalent to $0.83 dollar last year, but equivalent to only $0.77 dollar today. Even if the German economy is just as strong this year as last year, the conversion into U.S. dollar makes it appear smaller than before. Clearly, to determine who receives gold, silver, and bronze in the economic race this scoring system won't do.

Whether you get your hair cut in India or in the U.S. should not matter to you. But the income generated is very different: $20 in the U.S. and perhaps only the equivalent of $2 in India. The U.S. economy appears ten times as large as India's, even though the underlying production - one haircut - is the same. Awarding gold, silver, and bronze on this basis amounts to an accounting trick.

To mitigate this problem, economists have invented a measure called GNI at purchasing power parity (GNI-PPP). For example, whether you get your hair cut in India or in the U.S. should not matter to you. A haircut is a haircut. But the income generated is very different: $20 in the U.S. and perhaps only the equivalent of $2 in India. The U.S. economy appears ten times as large as India's, even though the underlying production - one haircut - is the same. Awarding gold, silver, and bronze on this basis amounts to an accounting trick. The idea behind the purchasing-power parity measure is to adjust all nations' GNI so that the numbers can be more truthfully compared to each other, product for product, and service for service.

When this adjustment is done, what we find is surprising. For 2003, instead of the top three spots belonging to the U.S., Japan, and Germany, they now belong to the U.S., China, and Japan. The U.S. retains its economic gold medal, but silver now goes to China, not Japan. Japan is bumped to third place, with India barely out of medal contention; Germany has dropped to fifth place. And when we project PPP-adjusted GNI's to the next Olympic year - 2008, coincidentally to be held in Beijing - we find that gold, silver, and bronze go to the U.S., China, and India. Now, both Japan and Germany are out of the medal count.

Reordering the ranking of the world's top economies by the purchasing-power parity measure has profound implications. For example, the Group of Seven (G7) - a rich-country club that meets annually to coordinate economic policy and which last met in June 2004 near Brunswick, Georgia - currently consists of the U.S., Canada, Japan, Germany, France, Italy, the U.K. (with Russia invited primarily for political reasons). The smallest two, Italy and Canada, should be replaced by China and India. If one were to decide to keep Italy and Canada on the A-list of invitees, then one should add Russia and Brazil because each have economies larger than Canada's.

As a group, in 2003 the four proposed new entries on this list - China, India, Russia, and Brazil - were economically larger than the six old countries, Japan, Germany, France, Italy, the U.K., and Canada. Combined, this new "gang of four" already sports a larger economy than the U.S. itself. Clearly, it is time that the G7 become a G11. And since economic power usually translates into political and military power, perhaps the U.N. Security Council should also be reconstituted along similar lines, in that case by at least adding Japan, Germany, India, and Brazil as these four have recently proposed.