GDP Nominal Vs GDP PPP
WHAT IS GDP?
GDP is the total value of all goods and services produced in the economy in a given period of time. E.g. Suppose only pen & books are produced in our country. In 2019, we produced 10 pens & 10 books. One pen cost is Rs.5 and one book cost is Rs.16 Thus total value of goods produced in 2019 is Rs.210
THEN WHY THERE IS NEED FOR GDP IN NOMINAL & PPP?
Each country reports its data in its own currency. For example- India’s GDP in the year 2016-17 was estimated to be Rs.1,52,51,028 crores. But we can’t compare GDP of India with other countries. To compare the data, Each country's statistics must be converted into a common currency.
2 MOST COMMON METHODS
1 Nominal GDP
2 GDP in PPP
NOMINAL GDP
In Nominal method, market exchange rates are
used for conversion. E.g. $1 = Rs.70 It is most commonly used method to make international comparisons.
BUT THERE IS A BIG DRAWBACK IN NOMINAL GDP
It does not take into account differences in the cost of living in different countries.
GDP IN PPP
It is more useful when comparing differences in living standards between nations. Let’s say,
You can buy a cup of coffee in the US for 1$. But, in India, you can buy a cup of coffee for just Rs.10 This is because the purchasing power is more in India as the cost of living is low.
Thus, you can have a higher standard of living in India with the same income you earn in the US. To account for the differences in the cost of living between countries, We use PPP exchange rate for conversion.
PPP EXCHANGE RATE
The PPP exchange rate is the ratio of the currencies purchasing power. E.g. You can buy a cup of coffee for 1$ in the US. In India, you can buy it for Rs.10. Hence, as per PPP, 1$ = Rs.10 and not Rs.70
NOW LETS CALCULATE GDP THROUGH NOMINAL & PPP
Nominal GDP ($1 = Rs.70):- Since in 2019, we produced Rs.210 value of goods Thus, 210/70 = $3 GDP in PPP ($1 = Rs.10):-- 210/10 = $21
SO WHY NOT ALWAYS CONSIDER GDP IN PPP?
The biggest drawback is, PPP is very hard to measure.2100 = $21