Forecasting China's Military Spending Through 2025

Measuring hard power: China’s economic growth and military capacity

“…To quantify (6) we would require data on the Personnel, Operations and Equipment shares of military spending and the various nominal price ratios measured in units of local currency. We can simplify the problem by appealing to the fact that a large amount of military equipment is tradable, or is produced using components that are tradable (Crane et al 2005). Hence arbitrage, or the law-of-one price, implies that the ratio of equipment prices is given by…”

“…If we wish to infer country's miliary capacity based on the size of its economy, however, standard PPP indices also pose a problem insofar as they reflect the relative price of an average basket of goods produced in the economy and this average price index may differ substantially from the price of military services. Thus Crane et al (2005) argue that, while military services have large personnel costs, a substantial share of military equipment purchased by developing-country militaries is imported or incorporates components that are manufactured from materials and parts sold at world market prices, such as electronics, diesel engines, or aircraft frames. Thus they suggest that, for some purposes, GDP measured at market exchange rates may give a more realistic picture of changes in military capacity (Crane et al 2005, pp.16-17).…”

“…The United Nations (1986) used relatively detailed price data to calculate military PPP indices for eight countries and Heston and Aten (1993) estimated real military expenditures across countries for 1985, using cross country regressions to extrapolate data from ICP benchmark countries. Crane et al (2005) look explicitly at the issue of China's growth and attempts to adjust China's PPP to take account of traded and non-traded goods in a way that reflects military shares.…”

“…Nevertheless, in principle, we can compare input prices and construct an appropriate input price index. As discussed by Crane et al (2005), the inputs used in producing defence services include a mix of traded and non-traded goods as well as personnel services. For example, inputs range from clothing, paper and electronics to aircraft frames, missiles and ships.…”

“…Department of Defense 2011). In particular numerous studies, for example by The Rand Corporation, The Brookings Institution and the U.S. Department of Defense, have expressed dissatisfaction with both PPP and market exchange rate comparisons for the purpose of evaluating real military capacity across countries (Crane et al 2005, O'Hanlon 2009, U.S. Department of Defense 2007.…”