GDP and PPP
How do we compare the standard of living in two different countries or in the same country over time? Comparisons of per capita Gross Domestic Product are one possible answer but what is GDP? What is nominal GDP? What is real GDP? And how do we compare US GDP of say 14.5 trillion dollars with Thai GDP of 9.5 trillion baht? It's more complicated than it looks! Exchange rates, for example, fluctuate much more rapidly than does the standard of living. Thus, in this video we look in more detail at the GDP statistic and how we compute Purchasing Power Parity adjusted GDP.
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How do actually use a PPP multiplier such as the ones provided by the WB or IMF? I understand the principle of it, but how do I transform a local price in a PPP price?
Typically you wouldn't do the transform yourself, you would simply look at the WB or IMF for PPP converted GDP figures. The transformation is pretty simple, however. The IMF calculates, for example, an Argentinian PPP value of 2.2 so you would take the Argentinian GDP in pesos in 2010 of ~400 billion multiply by 2.2 to get $880 billion PPP adjusted GDP in "international dollars". You could then calculate the PPP adjusted GDP per capita figures by dividing by population and so forth.
In India, GDP is calculated at Factor Cost and at Market Prices: there is at times a huge difference in the GDP growth calculated by the two methods.
In the financial crisis-fiscal stimulus year of 2008-09, GDP at Factor Cost grew by 6.7%, at Market prices grew by 3.9%. Why such a huge difference? How do they distinguish between a Cost and a Price? Measuring by Price seems simpler but how do they measure Costs? Which method is valid?
GDP at market prices takes into consideration the MARKET VALUE of all all final goods and services....... Economists refer to this measurement of GDP as the Expenditure Approach. In order to get an approximation for the GDP, they try to use another approach called the Income Approach, which sums up all factor earnings of all inputs or factors of production. You know in theory, Income is equivalent to Output.....(Y). The price at which you buy a product translates into what the factors of production earn, the wages to workers, the profit to the enterpreneur, etc. However, these market prices do not only reflect the factor costs incurred in producing those goods and services (eg, wage, rent, interest and profit). They include Indirect Business Taxes (IBT) and Subsidies (S), which are activities of government. The difference between GDP at factor cost and GDP at market prices is simply the presence / absence of IBT and S. To move from the former to the latter, you add IBT and substract S, and vice versa. In the fiscal stimulus year, S was high and IBT was low, so GDP at factor cost was higher than GDP at market prices. Growth in factor cost was thereby higher. As to whether which one is valid, I don't have any idea.