We all know GDP (Gross Domestic Product), and GDP Per Capita is calculated by dividing the GDP of a nation by its population. Essentially, it represents how much economic production value can be attributed to each individual citizen. In this post, I present GDP=PPP and compare it to GDP Per Capita for selected countries to see what insights we can gain.
GDP-PPP or GDP at Purchasing Power parity (PPP) is a different concept and measure that when combined with GDP numbers gives a more complete picture of a country’s economic status. GDP-PPP takes into account variations in living costs. It attempts to show how much money will be needed to buy the same quantity of goods and services in different countries.
It takes into account exchange rates between two countries and convert to a common unit of measurement, say an artificial “international dollars”. “The exchange rates used to translate monetary values in local currencies into ‘international dollars’ (int-$) are the ‘purchasing power parity conversion rates’ (also called PPP conversion factors)”. [ourworldindata.org] This ‘nternational dollars’ unit is essentially the USD.
Gross Domestic Product (GDP) on the other hand, is calculated using local currency units.
Richers countries will always have higher GDP, but their prices are also going to be higher on average. As a result, someone making $x in USA also has to account for prices of services and goods in the USA which may be much higher than in Ecuador for example.
So, if someone in Ecuador makes $60K per year, and a person in USA makes $100K per year, who actually has more purchasing power? That’s what PPP tries to answer. GDP alone will just show USA is much richer, but it wouldn’t give us an idea of actual purchasing power of goods and services locally.
Locally, is the key, because just because you have more money, you cannot realistically buy a good or service from a cheaper country…there are practical and trade restrictions (e.g. some products cannot be exported such as cost of education, transporation, taxes, everyday items, rent, etc.).
Below is a subset of data of GDP Per Capita in US dollars, GDP adjusted for PPP, and some additional calculated columns for comparisons across selected countries. By taking the USA as the reference country, we can then calculate a PPP conversion factor by dividing GDP PPP by GDP Per Capita of USA.
Then obviously the result will be 1 for USA (since we’re using USD as the reference), but if the result is higher than 1 for a country that implies a $1 goes further than $1 would in the USA. Anything lower than 1 means that in that country it’s more expensive to live than in the USA because $1 would not purchase $1 worth of goods/services as it would in the USA.
The columns in the following table:
GDP — GDP Per Capita in USD. PPP — GDP adjusted for Purchase Power Parity. PPPFactor — PPP/GDP. GDPtoUSA% — (GDP/USA’s GDP)100.
PPP data up to 2022 from: World Bank (baseline unit: current US$)
GDPtoUSA% column shows how many percent a country’s GDP per capita is of USA’s GDP per capita. i.e. Norway’s GDP per capita is 142% of that of USA (or 42% more). China’s is 17% of USA’s GDP per capita.
GDP, PPP figures rounded to nearest whole number.
A Visual:
Observations:
➜ We see that India’s GDP Per Capita is $2,411 whereas US’s is $76,330 which is about 32 times that of India. That is, India’s GDP Per Capita is just 3% of that of USA. However, the PPPFactor of India 3.48 meaning $1 would buy $3.48 worth of stuff in India (due to lower cost of living). So, adjusted for PPP, that $2,411 GDP Per Capita in India is more like $8,400. Therefore, their GDP does not need to be 32X to have a decent living.
➜ Switzerland’s PPPFactor is close to 1 (0.97) meaning $1 USD buys just a little less amount of goods/services in Switzerland as it does in the USA. However, Switzerland’s GDP Per Capita is 22% more than that of USA. So, in the end, they have more wealth per capita.
➜ Singapore’s GDP is 8% higher than of USA but $1 goes farther to $1.54 (PPPFactor), thereby making their residents wealthier than in the USA overall.
➜ Denmark’s GPD is about 11% less than that of USA, but a $1 buys them $0.15 more making their PPP adjusted GDP to $77K+ (compared to $76K in USA).
➜ Bangladesh’s GDP per capita is higher than that of India, however, PPP adjusted, their purchasing power is slightly less than that of India (@$7.4K vs $8.4K) due to inflation or higher cost of living.
I hope this was helpful to understand the differences between GDP and PPP at a high level. Happy charting!
Related Posts:
