Purchasing power parity

Another is a purchasing power parity adjusted WigB.

And then, of course, we have the nominal GDP adjusted WigB, which is the one that's used here.

So weighting by PPP actually shifts the balance of weight quite decisively compared to the base WigB.

So PPP adjusted GDP measures output after adjusting for local price levels.

So economies where goods and services are cheaper appear larger than they do at market exchange rates.

So in the Wigbee, that produces a very major rotation towards China and a broader group of emerging markets.

So using the August 2026 profile, for instance, the US falls from about 41% of the base Wigbee to 25% of the PPP weighted Wigbee.

And PPP weighting also raises China from roughly 12% to about 33% and makes it the largest country.

So there was a lot of discussion on Substacks and Twitters and so on of these themes.

The first one is what has been described as the great PPP war, purchasing power parity war.

And we'll go into explaining very briefly what that is.

And the second one is to do with trading balances and the way they are again on their own and effectively shaping the discussion around the second China shock and where Europe is and what we should be doing.

And I think this is maybe the translation between sort of a measure of GDP, GDP per capita, and we can discuss that, and conclusions on living standards.

And moving from one to the other is not always obvious.

I think Luis Garicano really played on that Draghi alarm and stressed that this divergence in GDP per capita measured in PPP terms, so adjusted for purchasing power, was a very big issue.

I tend to be of the view that it's not as big an issue as I think Luis would say.

Go up to the Northwest in Seattle or somewhere like that and you're making 70, you're below the poverty line.

You know, it's, uh, uh... [clears throat] PPP, purchase power parity, attempts to ask not merely how many dollars an economy, uh, can, you know, convert into today's foreign exchange rate, but how much actual economic power that local currency commands in its own country.

So once you measure the major eco- economies in that way, uh, uh, the, the list changes dramatically of who is in the, the top positions.

According to the World Bank, now this is the World Bank, Western-controlled institution, their purchase power parity rankings, China is number one, not the US.

China is first, the US is second, India is third, and Russia is fourth.

That means China, India, and Russia are three out of four, obviously, top positions in the world.

So this figure doesn't magically eliminate the advantages the dollar or the US possess in technology, capital, uh, global finance, or high-value industry, and you shouldn't use it, uh, as though PPP and nominal GDP, it measure exactly the same thing.

They don't.

Very much depends on how would the government decide about its subsidizing policy.

These policies in Iran, you know Iran's GDP is about $360 billion, while Iran's GDP PPP is about $1.8 trillion.

So this huge gap between the market prices in Iran and the global prices of the produced and manufactured goods and also the services are mostly can be explained by the government's subsidizing or subsidies policy.

If the government continues to subsidize wants to continue to subsidize most of its economy, especially the energy sector, which is now becoming the bottleneck of Iran's economic resiliency.