Marquee Moon wrote:I believe the PPP list is more accurate, since nominal exchange rates distort the real values of GDP. In other words, India's Rupee is undervalued, which makes the Indian economy look smaller than it actually is.
No, it doesn't work that way. Long-term, structural differences between nominal and PPP-adjusted GDP are not caused by 'mistakes' in the exchange rates. They are mostly caused by factor productivity differences between sectors of the economy. Exchange rates are mostly influenced by tradable
(exportable) parts of the economy, (and by parts with heavy foreign investments, but those are mostly the same sectors). They move (roughly) to make pricess of tradable products equal around the world. If a country's tradables are nominally cheap, their exports rise, causing their currency to appreciate.
But GDP also includes non-tradable productions, and there is no such mechanism to equalize prices there. In rich, modernized countries non-tradables are relatively expensive, and nominal GDP counts production by its price.That's the main reason behind those PPP-adjustments: an identically productive cook in a rich and a poor country gets counted as far more productive in the rich country.*
So PPP-adjusted GDP is useful to determine the lifestyle of the people in the country because they consume both tradables and non-tradables, roughly in the same ratio as the country produces them.
Now here's the problem: the power and influence of a country abroad is much stronger determined by tradables than lifestyle. On the carrot side, it's what you use for bribes. Simply by paying money and goods, but also by offering access to markets etc. And on the stick side, weapon systems are very much tradables. Without much exception, efficient producers of weapons are also efficient producers of other tradable goods and services.
So nominal GDP is a better determinant of potential power in the international world than PPP-adjusted GDP. The best number will be somwehre in between