GDP and PPP

Macroeconomic parameters are important to measure the economy of any country. GDP nominal and GDP PPP are economic indicators of utmost importance. GDP nominal can be used more statistically. In contrast, GDP PPP can be used for specific decision-making. The primary distinction between GDP and PPP is that GDP is the existing market price’s gross domestic product. And GDP (PPP) is the GDP modified to US dollars utilising purchasing power parity prices, which are then split by the aggregate prices. This article will read about the difference between GDP and PPP and the relationship between GDP and PPP.

Gross Domestic Product 

GDP nominal is GDP that cannot be altered for indicating the inflation rate, so it is at current market prices. The monetary values of all commodities and services generated in a given period can be called GDP, and it is valued quarterly or yearly. The output of GDP is calculated based on the place of production.

Purchasing Power Parity

The PPP economic indicator is used to compensate for the discrepancies in exchange rates across countries. GDP (PPP) cites GDP split up by the cumulative population approximated to US dollars using purchasing power parity ratios. The exchange rate between two assets can be indicated to be proportional to the percentage of their purchasing power. If we calculate the value of a country’s goods and services again as if they were offered at US rates, PPP will tell us the living standards of any country as compared to US rates. 

Example: The US and China each have a GDP of $400 million and $200 million, respectively. But as you can see, the US’s GDP is more than $200 million as compared to China. Suppose you purchase a basket of goods worth $400 in the US and $200 in China. 

You can tell that you can buy more goods in China at the same price compared to the US. One million baskets of goods can be purchased in the US, and 1.75 million baskets can be purchased in China. That is, the exchange rate of each country is different and varies. 

Association Between GDP and PPP

GDP can be used as the measure of national output, while PPP can be used as an exchange rate used to compare the output of other countries. Generally, every country uses GDP to find the economic output. It is the total value of new final goods and services generated within the country boundaries annually or quarterly.  GDP is typically calculated by each country’s national statistical service and is expressed in the country’s own national currency, concerning the prices in effect at that time.

Example: In 2016, Malaysia’s GDP was 1.23 trillion Malaysian ringgit. At the same time, India’s GDP was about 152 trillion rupees, and the US was at USD 18.6 trillion. If you observe one single country, every country uses its currency. But if there is a comparison between two countries, then you need to convert one currency to another. In other words, you’ll need to pick which exchange rate to use in your calculations. Here, you will be confused about whether to use US dollars, Indian rupees, or Chinese Yuan. 

This is why you will want a means called PPP. It can have different types of meanings in economics, but generally, it is specifically defined as the exchange rate. This exchange rate is used to compare two currencies. The market exchange rate tells you how many Malaysian ringgit you can get for a thousand dollars in the US. On the other hand, PPP exchange rates tell you how many ringgit you will require in Malaysia to buy a typical box of products and services worth $1000 in the US. As market exchange rates depend on transactions across different countries or international boundaries, many of the items or services that influence the GDP do not change in international trade. 

Conclusion 

GDP and PPP impact the prices of goods and materials that users consume. GDP is utilised to deduce the PPP exchange rate rather than the market trade ratio. Therefore two countries’ purchasing power can slightly be different because of these exchange rates. GDP and PPP are related to each other, however, you also got to know about the differences between GDP and PPP.