Graphic from the World Bank - Tracking GDP in
PPP terms shows rapid rise of China and India
These 20 Countries Will Dominate Global Growth in
2024
INTERNATIONAL GDP COMPARISON:
In order to compare the GDP figures of two countries it is
first necessary to convert them to a common unit of account (say, the US dollar).
A fundamentally important question that arises when one tries to convert local currency GDP values into their
US dollar equivalent values is the following:
What exchange rate do we use to make the conversion – market exchange rates or purchasing power parity (PPP) based exchange rates?
What exchange rate do we use to make the conversion – market exchange rates or purchasing power parity (PPP) based exchange rates?
Using market exchange rates is problematic for several
reasons:
- Under floating exchange rates, currency values fluctuate considerably, even over a short period of time.
- Using market exchange rates will result in a failure to account for the vast differences in the prices of many services and non-traded goods between rich and poor countries.
“GDP is measured in the currency of the country in
question. That requires adjustment when trying to compare the value of output
in two countries using different currencies. The usual method is to convert the
value of GDP of each country into U.S. dollars and then compare them.
Conversion to dollars can be done either using market exchange rates—those that
prevail in the foreign exchange market—or purchasing-power-parity (PPP)
exchange rates. The PPP exchange rate is the rate at which the currency of one
country would have to be converted into that of another to purchase the same
amount of goods and services in each country (see "Back to Basics" in
the March 2007 issue of Finance & Development). There is a large gap
between market and PPP-based exchange rates in emerging market and developing
countries. For most emerging market and developing countries, the ratio of the
market and PPP U.S. dollar exchange rates is between 2 and 4. This is because
nontraded goods and services tend to be cheaper in low-income than in
high-income countries—for example, a haircut in New York is more expensive than
in Bishkek—even when the cost of making tradable goods, such as machinery,
across two countries is the same. For advanced countries, market and PPP
exchange rates tend to be much closer. These differences mean that emerging
market and developing countries have a higher estimated dollar GDP when the PPP
exchange rate is used”.
Here is a brief introduction to PPP exchange rates from
the IMF:
https://www.imf.org/external/pubs/ft/fandd/basics/ppp.htm
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Debate Surrounding the Accuracy of China’s GDP Data:
Visual Evidence: Shenzhen – Transformation of a fishing village in
to the skyscraper capital of China
China’s officially reported statistics appears to smooth out
volatility in the underlying data. The average reported growth rate has,
however, proven to be quite accurate:
Is China Fudging its GDP Figures? Evidence from
Trading Partner Data
Related:
http://www.nber.org/papers/w23323.pdf