Table of Contents
GDP IN NOMINAL
GDP IN 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 1,52,51,028 crores.
- But we can’t compare GDP of India with other
- To compare the data, Each country’s statistics must be converted into a common
2 MOST COMMON METHODS
- Nominal GDP
- GDP in PPP
NOMINAL GDP
- In Nominal method, market exchange rates are used for conversion.
- g. $1 = Rs.70
- It is most commonly used method to make international comparisons.
BUT THERE A BIG DRAWBACK IN NOMINAL GDP
- It does not take into account differences in the cost of living in different
GDP IN PPP
- It is more useful when comparing differences in living standards between nations.
- Let’s say, You can buy a cup of coffee in the US for 1$.
- 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.
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