The Fed - The State of AI Competition in Advanced Economies

The Federal Reserve Board's note on 'The State of AI Competition in Advanced Economies' provides a detailed comparison of AI capabilities across major economies, focusing on the United States, China, and other advanced foreign economies (AFEs). The analysis begins by acknowledging that popular composite indices—such as the WIPO Global Innovation Index, IMF AI Preparedness Index, Stanford Global AI Vibrancy Tool, and Oxford Insights Government AI Readiness Index—place the United States at or near the top, with the United Kingdom close behind, Italy lowest among G7 members, and China's rank varying from just below the US to significantly lower depending on the index. However, the note warns that these indices suffer from methodological limitations, including indicator selection and aggregation biases that may obscure core AI performance metrics. To address this, the note examines key metrics across three dimensions: physical and digital infrastructure, investment and firm dynamics, and adoption across the economy. The findings indicate that the United States retains durable advantages in infrastructure (with the notable exception of electricity-related infrastructure), compute capacity, and investment conditions. AFEs face greater challenges in scaling compute resources and attracting investment, while China has achieved rapid gains in research output and adoption but its position in enabling infrastructure remains ambiguous. Overall, despite increased competition in research and applied domains, US strengths in core AI enablers appear resilient and long-lasting.