For the purposes of comparing military potential, I would say it depends on the country. For e.g. Saudi Arabia, which imports almost all its arms and employs foriegn mercenaries to maintain them, nominal GDP would probably be the best measure. For China, which makes almost all its own weapons and pays its troops in its own currency, PPP would be better. For India, somewhere in between.
Exactly.
PPP GDP is a better metric than nominal GDP to measure a country's purchasing power, so to measure the different costs of living, PPP per capita GDP is still the best component to use. This applies to the military field.
But some problems with this measure may arise. The World Bank's GDP PPP takes the value of GDP, converts it into dollars, and then divides the result by a "magic index", which is a basket of products arbitrarily chosen by the bank's bureaucrats. The curious thing is that the IMF and the CIA adopt the exact same procedure, except that each one has its own basket of products.
The consequence?
When measuring the GDP of countries by Purchasing Power Parity, the three lists generated are quite different from each other. As the Wikipedia entry itself says, "As estimates and assumptions must be made, the results produced by different organizations for the same country tend to vary, sometimes substantially. PPP are estimates rather than hard facts, figures and should be used carefully."
This analytical arbitrariness causes problems in measuring PPP GDP. For example, let's say you live in mainland China and there the barber pays ¥10, while in China's biggest and richest city, shaving at a barber costs ¥50. What cost will we be based on?
I think the PPP is overestimated and cannot be used to find a real value, what you can do is take all the economic indicators and make a big picture why the IMF itself, as well as any institution of this size, show all the indicators, which people will prefer and how they will interpret this data and something else.
The PPP itself does not indicate the real value, because in a low-wage economy, the PPP tends to be overestimated, that is, it cannot be used as a REAL measure, to be a REAL unit, as some use to reach a common denominator . PPP is used together with other indicators and aggregates to have a view as a whole.
In short, PPP does not abort inflation that takes away the value of the currency's purchasing power, PPP does not abort how the exchange rate affects imports, which are very important for globalized economies, this significantly reduces the purchasing power capacity, it cannot and should not use it as a vestment to define real equivalence between 2 economies like this, randomly, without taking into account other aspects and not counting that they are totally different economies, you cannot define what has the same value in each one, not counting the exchange.
The PPP method is good to be used to measure the exchange rate that is conferred by the relative purchasing power between countries. The GDP PPP measure reflects the differences in the cost of living in different countries. The advantages of using nominal GDP numbers include that less estimation is needed, and they reflect the share of a country's inhabitants in the global economy more accurately.
