Mysteries of GDP: how and why Russia became the fifth economy in the world

The ranking of world countries by gross domestic product (GDP), calculated by World Economics on the basis of purchasing power parity, brought Russia an honorable fifth place in 2023. How did this become possible? After all, if the Russian gross domestic product, the nominal size of which at the end of 2023, according to Rosstat, amounted to 171,041 trillion rubles, is recalculated in dollar equivalent, we get a figure that is only slightly higher than $2 trillion. And this is not such a large value, considering that the US GDP, according to official statistics, in 2023 amounted to $26.9 trillion, China – $19.4. And the gross domestic product of Japan, which Russia overtook in the GDP ranking calculated by purchasing power parity, was at the level of $4.4 trillion in 2023, which is 2.2 times higher than the size of Russia’s GDP in dollars, which ranks only 9th by this indicator. e place in the world.

If anyone has managed to get confused in the intricacy of numbers, let’s repeat it again. So, Russia’s GDP in dollars is just over $2 trillion, and according to this indicator the country is in 9th place in the world. And Russia’s GDP in purchasing power parity is $5.5 trillion, which puts the country in fifth place in the global ranking. What is this mysterious indicator of purchasing power parity that can so easily increase or decrease the value of the GDP of a huge country? And how much can you trust him?

Purchasing power parity (PPP) shows how cheap or expensive any goods and services produced in a country are, measured in foreign currency units (usually US dollars) and compared to the cost of similar goods and services in other countries. This is necessary in order to determine how many goods can be bought in a given country for a certain amount, say $100. Not long ago, a similar study was conducted by the famous American journalist Tucker Carlson, who visited Moscow in February of this year to interview the president of our country. In the Russian capital, a journalist bought a set of groceries for a week in a store, paying 9,400 rubles (at the rate of the Central Bank of the Russian Federation at the beginning of February, approximately $103), and concluded that exactly the same grocery set in the United States would have cost him almost four times more (approximately $400 ). Thus, according to Carlson’s calculations, the purchasing power of the ruble in Russia is much higher than the dollar in the United States: after all, with an amount in rubles equivalent to $400, in Russia he could purchase four such food sets or buy, in addition to groceries, something else for himself and as a gift to loved ones.

When economists calculate GDP taking into account purchasing power parity, they take into account not just the total cost of goods and services in a given country, recalculated, say, in dollars, but the cost of goods and services comparable to the cost of their counterparts abroad in dollar equivalent. If the country’s nominal GDP is simply converted from the national currency into dollars, then this indicator does not tell us anything except how much its dollar value is greater or less than in other countries. And here Russia, although it wins compared to the vast majority of countries in the world, does not even reach a place in the top five largest countries. And if GDP is calculated using PPP, it shows how many goods the same amount of foreign currency can buy in your country compared to other countries.

So, in the ranking of the world’s largest economies from World Economics in terms of GDP calculated taking into account PPP, Russia was in fifth place with an indicator in dollar equivalent of not $2 trillion, but as much as $5.5 trillion. In the same ranking, the world’s largest economy was not the United States, but China, with a PPP GDP of $31.56 trillion. The USA comes only second with an indicator equal to $23.15 (that is, 14% lower than the absolute size of GDP). And India took third place with a GDP at PPP of $15.87 trillion. Japan took fourth place in the ranking with a PPP GDP of $5.7 trillion, which is slightly higher than Russia.

And yet, how did Russia, with its GDP equal in absolute terms to $2 trillion in dollar equivalent, almost triple this figure by World Economics experts, calculating it taking into account purchasing power parity? When calculating annual GDP according to PPP, economists take into account not only what the total value of all produced goods and services was created by all enterprises and industries of a given country in a year, but also how much this value turned out to be cheaper (or more expensive) in dollars than in other countries .

In 2022, Russia also ranked fifth in the same World Economics ranking, and this happened even despite the decline in Russian GDP. This happened thanks to the record high income of the Russian Federation from the export of oil and a number of other goods (agricultural products, metals, mineral fertilizers). And also because many countries in the world also experienced a decline in GDP in 2022. Although 2023 was a year of tough sanctions for the Russian economy, due to the growth of state defense orders and import substitution, Russian GDP grew by 3.6%. A significant contribution to the increase in the indicator was also made by the growth in construction volumes, retail sales, and the service sector, including financial and banking. Ultimately, this rise in various industries was a consequence of the increase in the purchasing power of the population. Although the ruble collapsed last year and inflation rose, at the same time 2023 became a year of unprecedentedly high wage increases and an increase in real incomes of the population, which had previously fallen for almost ten years.

Meanwhile, the world economy in 2023 grew, according to the IMF, by only 2.6%, the economy of 19 eurozone countries – by only 0.5%. And Germany, the largest economy in the European Union, generally faced a decline in GDP of 0.3%. In Germany, the economic downturn was caused by a combination of different factors, but the main ones were the country’s refusal of cheap Russian pipeline gas and high interest rates in the eurozone, which negatively affected economic growth. Therefore, Germany in the GDP ranking by PPP for the second year in a row gives way to Russia as the fifth economy in the world. Although this indicator does not take into account the level of inflation, which negatively affects the effective demand of the population, a feature of the development of the world economy in 2022–2023 was that almost the entire world suffered from rising inflation at the same time. This year, inflation in the eurozone countries is slowing, and the world’s central banks are already preparing to lower interest rates. However, Germany is unlikely to regain its lost fifth place in the ranking this year. There are also difficulties in the UK, which has also abandoned cheap Russian energy resources. But France, Italy and Spain in the coming years may present surprises in the form of increased growth rates after almost two years of stagnation and prove that the Old World is still capable of demonstrating high economic efficiency. Among developing countries, the states of the Middle East, especially Saudi Arabia, and some countries of the Asia-Pacific region, for example Indonesia, deserve close attention, which, perhaps, in a few years will be in the top ten of the GDP ranking by PPP. Among the countries of the post-Soviet space, you can pay attention to Kazakhstan, which over time will also be able to get into the top 10 of this rating.

If you look at another rating compiled by the IMF and the World Bank based on the value of the world’s GDP per capita, it will not be very comforting for Russia. In this ranking, Russia ranks only 60th among more than 200 countries. The United States ranks 10th in terms of GDP per capita. The first and second places here belong to Luxembourg and Singapore, very small countries in terms of area and population, but with a high standard of living. At the same time, huge China with a population exceeding 1.4 billion people ranks only 82nd in this indicator, and India, the fastest growing major economy in the world, “deserves” only 136th place. And this rating, even though it is also conditional, partly reflects the standard of living in different countries. So Russia, even though it is the fifth largest economy in the world, still has work to do. And above all, on issues of demography and population growth, as well as on an even greater increase in the size of GDP in order to increase the income of the population to the level of the richest countries in the world.