Appendix 8E. International comparisons of military expenditures: issues and challenges of using purchasing power parities

Summary

Comparing one country’s expenditure on the military (or any other sector) with that of another country expressed in a different currency poses significant problems. A traditional approach has been to convert currencies using market exchange rates. A preferable method is to use PPP rates, which indicate how much, hypothetically, it would cost in one country to acquire the same (military) goods and services bought by another country, and thus allow more accurate international comparisons of the economic burden represented by the spending. However, there are conceptual and empirical issues in the estimation of PPPs that need to be resolved. In the case of military expenditure, these are further compounded by military secrecy, the coverage of military budgets, the nature of military prices and the uniqueness of military products.

Michael Ward (UK) is an independent consultant on economic statistics and development issues. He previously worked for the World Bank.