Purchasing Power Parity
Introduction
The Gross Domestic Product (GDP) is the measure most often used to represent the size of a country’s economy. The GDP for any country can be thought of as the summation of the prices times their quantities for all products and services consumed over a year’s time. The GDP is also used on a per capita basis to represent the flow of goods and services available to countries to contribute to their economic well being. Through an effort led by the United Nations, the 1993 system of national accounts (SNA) provides a common international framework that ensures economies are measured the same way across countries.

It is also important to examine the share or contribution of various economies to the global economy. The GDP and its aggregate components are the primary basis for comparing the relative sizes of various economies in different regions. Measures across countries of investment as a share of total GDP are used to evaluate and compare its impact on economic growth. For example, one-third of the world’s population, represented by China and India, has been growing rapidly in the past 10 years and their contribution to world economic growth is roughly 3 times higher at PPPs than exchange rates. So it is very important to measure them correctly.

The relationship between the US and Euro dollars provides a good example. In 2002, it took US$.91 to purchase a Euro, while in 2004 it takes US$1.21. This has occurred during a period when both regions experienced low rates of inflation and moderate growth rates. This means roughly that a Euro country like France had an exchange rate converted GDP relative to the US that was 1/3 (1.21/.91) higher in 2004 than in 2002. Clearly the use of exchange rates gets both the level and changes of the productive capacity of countries wrong.

Further, many ratios to GDP are likely to be distorted when exchange rates are used. For example energy use, a physical measurer, per unit of GDP makes poor countries look very wasteful at exchange rates and tends to bias forecasts of future energy use upward, as compared to use of PPPs. Likewise, comparisons of shares of GDP in national currencies (which are the same at exchange rates) across countries tend to distort our understanding of the world economy. For example, the share of health and investment expenditure in rich countries in national currencies overstates their real health services and understates their investment compared to poor countries, when account is taken of their relative prices, the task of ICP.

The long-standing recognition of these deficiencies led to the development of Purchasing Power Parities (PPP) as a more appropriate currency converter to compare the GDP and its components across countries. The Purchasing Power Parity between two countries is the rate at which the currency of one country needs to be converted into that of a second country to represent the same volume of goods and services in both countries.

Global Economy

 

GDP (purchasing power parity)

GDP- per capita (PPP)

$69.62 trillion (2008 est.)

$10,400 (2008 est.)

$67.54 trillion (2007 est.)

$10,200 (2007 est.)

$64.32 trillion (2006 est.)

$9,800 (2006 est.)

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