"The simplest way to measure the relative sizes of the U.S. and Chinese economies is to take each country’s gross domestic product, which is measured in national currency, and convert them to a common currency at market exchange rates — which usually
involves converting yuan to dollars, although it wouldn’t make a difference if you did it the other way around. When you do that, China comes in second, with a 2022 G.D.P. of $18.1 trillion compared with America’s $25.5 trillion.
But that comparison doesn’t adjust for prices in the two countries. If you adjust for differences in the cost of living — the bars labeled PPP, for “purchasing power parity” — China is already well ahead.

Why might we want to adjust for prices? One answer is that when you’re looking at changes over time, dollar comparisons of national G.D.P.s can be greatly affected by movements in foreign exchange rates, which can be highly volatile.

https://www.nytimes.com/2023/08/11/opinion/china-us-economy.html
...
But there’s another reason to adjust for prices. If you want to compare either the real sizes of two economies — the total amount of stuff each produces — or their standards of living, you want to know if goods and services are cheaper in one
economy than in the other and to take that into account.

This is especially true if you’re comparing a high-income economy like the United States with a middle-income nation like China or, even more so, with a low-income country like India. That’s because there is a systemic tendency for prices to be lower
in poorer nations, because of the Balassa-Samuelson effect (discovered and analyzed simultaneously and independently by Bela Balassa and Paul Samuelson in 1964).

To understand this effect, imagine a simplified world in which labor is the only input into production, and production can be divided between goods like steel or airplanes that can be traded on world markets and goods or services like haircuts that must
be supplied close to the consumer. In such a world, countries would have to be competitive in the production of traded goods, so their wage rates in dollars would reflect their productivity in tradable goods (like the airplanes), not nontradable goods (
like the haircuts).

But it turns out that technologically advanced countries, while they’re generally more productive than less advanced countries across the board, tend to have a bigger advantage in tradables than in nontradables. Such countries have high wages, but
these wages are reflected in higher prices for nontradables and hence in an overall higher price level than in poorer countries."

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