PPP stands for purchasing power parity, and GDP (PPP) stands for gross domestic product. This article covers a list of countries ranked by their expected GDP prediction (PPP). Countries are sorted based on GDP (PPP) prediction estimates derived from financial and statistical organisations using market or official exchange rates. The information on this page is in international dollars, which is a standardized unit used by economists. If they are different jurisdiction areas or economic entities, several territories that are not usually recognized countries, such as the European Union and Hong Kong, appear on the list.
When comparing the domestic market of a country, PPP comparisons are arguably more useful than nominal GDP comparisons because PPP considers the relative cost of local goods, services, and inflation rates of the country rather than using international market exchange rates, which may distort the real differences in per capita income. It is, however, limited when comparing the quality of similar items between countries and evaluating financial flows between countries. PPP is frequently used to determine global poverty thresholds, and the United Nations uses it to calculate the human development index. In order to estimate a representative basket of all items, surveys like the International Comparison Program include both tradable and non-tradable goods.
The first table shows estimates for 2020 for each of the 194 nations and areas covered by the International Monetary Fund’s (IMF) International Financial Statistics (IFS) database (including Hong Kong and Taiwan). The figures are in millions of dollars and were estimated and released by the International Monetary Fund in April 2020. The second table contains data for 180 of the 193 current United Nations member nations, as well as Hong Kong and Macau, largely for the year 2018. (the two Chinese Special Administrative Regions). The World Bank compiled the data, which is in millions of international dollars. The third table provides a summary of the 2019 CIA World Factbook GDP (PPP) data. The data for GDP at purchasing power parity has also been rebased and projected to 2007 using the latest International Comparison Program price surveys. In cases where they exist in the sources, non-sovereign entities (the world, continents, and some dependent territories) and nations with restricted recognition (such as Kosovo, Palestine, and Taiwan) are included in the list. These economies are not ranked in the graphs, but are instead listed in order of GDP for comparison purposes. Non-sovereign entities are also highlighted in italics.
In the European Single Market, the European Union shares a common market with Iceland, Liechtenstein, Switzerland, and Norway, which ensures the free movement of commodities, capital, services, and labor (the “four freedoms”) among its member states. The EU is also a participant in international trade discussions, and thus may appear on various lists. The EU could be placed above or below the US, depending on the approach used. The World Bank, for example, projects the European Union’s GDP (PPP) to be $20.78 trillion in 2019.
What makes PPP more precise?
The precision of PPPs improves as the aggregate level rises. This means that the PPP for final household consumption or gross capital formation (and consequently the PLI, real expenditure, and volume index per capita) at the GDP level will be more trustworthy or precise than the PPP for final household consumption or gross capital formation. Similarly, the PPP for “food and non-alcoholic beverages” or “clothing and footwear,” both of which are sub-aggregates of final household consumption, will be more trustworthy.
Data for the PPP compilation process originates from a variety of places, including particular PPP pricing surveys and national accounts. This makes calculating any meaningful, numerical assessment of error margins for PPPs difficult. PPPs, PLIs, and other PPP-based metrics, on the other hand, are widely acknowledged as not being meant to establish a rigid ranking of countries. The level of uncertainty associated with fundamental pricing and spending statistics, as well as the methodologies used to compile PPPs, can result in inaccuracies that affect country rankings, especially when countries are concentrated around a limited range of outcomes. PPPs and PPP-based indicators thus provide a measure of a country’s relative magnitude in comparison to other countries in the comparison. As previously stated, this is more true at a low level of aggregation than, for example, GDP or GDP per capita.
Sampling error
The range of commodities and services, which are not equally representative of all nations included in international comparisons, is the most prominent source of statistical margins of sampling mistakes in price surveys. The proportion of consumption expenditure varies per country, which can lead to inconsistencies in representativeness and data comparability.
Non-sampling error
Measurement errors can arise in consumer goods pricing surveys due to non-compliance with the tight specification of the products in the product sample, such as packaging sizes or quality standards. While the validation procedure seeks to eliminate these inaccuracies by comparing and assessing the price material provided by each country, some of these faults, particularly those linked to quality, might be difficult to spot. Similar issues can arise in other polls, such as the annual survey on public sector employee compensation. The problem here is caused by the disparity in data sources among countries.
While non-response from one statistical unit can usually be readily overcome by changing that unit, and usually has very little impact at the level of the published categories anyhow, a unique challenge arises when no prices for a certain commodity are available in one or more nations. In these circumstances, a price relative is calculated based on the prices of similar products. If a country does not disclose prices for any sample product under a certain basic heading, the gaps are usually replaced with the PPP of a “similar” or a hierarchical, basic heading.
Quality management
Statistics Denmark follows the recommendations in the Code of Practice for European Statistics (CoP) on quality organization and management, as well as the implementation requirements in the European Statistical System’s Quality Assurance Framework (QAF). To maintain continuous management of products and processes, a Quality Working Group and a central quality assurance role have been developed.
Quality assurance
Statistics Denmark adheres to the standards outlined in the Code of Practice for European Statistics (CoP) and implements them using the European Statistical System’s Quality Assurance Framework (QAF). This entails constant decentralized and central control of products and processes based on international standards-compliant documentation. The Working Group on Quality receives reports from the central quality assurance department. Reports provide proposals for improvement, which are evaluated, decided upon, and then implemented.
Data revision – policy
Statistics Denmark revises published numbers in accordance with Statistics Denmark’s Revision Policy. For some statistics, the Revision Policy’s general procedures and concepts are reinforced by a specialized revision practice.
Data revision practice
The changes between provisional and final data are small. PPPs are no longer amended after the final PPPs for a certain reference year have been calculated. The complete time series of PPPs is rescaled to the current national accounts aggregates twice a year, in June and December, and the database updated correspondingly, in order to preserve the best possible degree of consistency with national accounts.
Is PPP a superior metric?
As a result, PPP is widely viewed as a more accurate indicator of overall happiness. PPP’s disadvantages The most significant disadvantage is that PPP is more difficult to calculate than market-based rates.
Is it better to utilise nominal GDP or PPP?
Macroeconomic parameters are crucial economic indicators, with GDP nominal and GDP PPP being two of the most essential. GDP nominal is the more generally used statistic, but GDP PPP can be utilized for specific decision-making. The main distinction between GDP nominal and GDP PPP is that GDP nominal is the GDP at current market values, whereas GDP PPP is the GDP converted to US dollars using purchasing power parity rates and divided by the total population.
What exactly is the distinction between PPP and GDP?
Based on purchasing power parity, GDP per capita (PPP). PPP GDP stands for buying power parity GDP, which is gross domestic product translated to foreign currencies using purchasing power parity rates. The purchasing power of an international dollar is equal to that of the US dollar in terms of GDP.
Which of the currencies has the most purchasing power?
Kuwait’s riches can be traced to its heavy oil exports to a global market. Kuwait is located on the point of the Persian Gulf, between Iraq and Saudi Arabia.
It was first issued in 1961, following the country’s independence from the United Kingdom, and has since become the world’s most valuable currency.
The Kuwaiti Dinar has been tied to a variety of currencies over the years. It was most recently tied to the dollar from 2003 to 2007.
It was recently tied to an unnamed basket with a value of 1 KWD to 3.29 USD.
Why does the PPP theory fail to hold true in practise?
- When transportation costs, trade barriers (e.g., tariffs), differences in prices of nontradable inputs (e.g., rental space), imperfect information about current market conditions, and other Forex market participants, such as investors, trade currencies for other reasons, Purchasing Power Parity (PPP) will not be satisfied between countries.
- Relative PPP is a dynamic variant of the theory that links currency appreciation or depreciation to inflation rates in different countries.
What exactly does a greater PPP imply?
Prices are higher in richer nations, according to empirical evidence: there is a positive cross-country link between average earnings and average prices. This is demonstrated in the graph below, which graphs GDP per capita (in US dollars) against price levels (relative to the US). In the 1960s, Balassa and Samuelson formalized this observation, which is now known as the ‘Penn effect.’
It’s difficult to pinpoint the sources of the Penn effect, but economic theory offers some clues.
One theory, which has gotten a lot of attention in the academic literature, revolves around cross-country productivity differences, specifically the fact that labor in affluent countries is more productive due to the adoption of more modern technologies.
The ‘Balassa-Samuelson model’ boils down to this. The wider the variations in wages and prices of services between countries, the larger the gap between purchasing power parity and the equilibrium exchange rate. In terms of purchasing power parity, if international productivity gaps are greater in the production of tradable products than in the production of non-tradable items, the currency of the country with the higher productivity will appear to be overvalued. As a result, the ratio of purchasing power parity to the exchange rate will rise as income rises.1
This scatter plot depicts the relationship between productivity and price levels.
What does increased GDP PPP imply?
Now put this into practice in your daily life. The orange juice represents the “basket of commodities” that was previously discussed, which indicates the cost of life in a country. As a result, even if a country’s GDP per capita (individual income) is higher, its citizens may still live in poverty if the cost of living is higher.
There are some issues with utilizing the market basket to compute PPP. It can be difficult to establish an accurate market basket because people in various countries buy different things. As a result, PPP may not always accurately reflect the true worth of money in different countries.
How do you compare two countries’ PPPs?
Cupcakes, on the other hand, aren’t exchanged, thus the market exchange rate doesn’t account for the fact that they’re “cheaper” in India. Similarly, in both countries, all non-traded items are not represented in the market exchange rate. As in this situation, it is often assumed that the official exchange rate will understate developing country living standards.
Because developing countries are more likely to attain factors of production, such as lower unit labor costs, non-traded items are often cheaper (the Balassa-Samuelson effect, among others, provides a different explanation regarding the price differential between traded and non-traded goods). It is usually assumed that as a country develops, more items will be exchanged and the difference between the PPP and market exchange rates will narrow.
PPP ratios allow for more accurate comparisons of living levels between countries.
Uses of Purchasing Power Parity
Large disparities in inflation rates around the world make it difficult to compare and quantify the relative outputs of economies and their living standards. Variables based on PPP are in real terms, allowing for comparisons. Based on the most recent estimates, the difference between nominal GDP and PPP-based GDP is depicted in the diagram below.
Because they do not exhibit substantial oscillations in the short run, PPPs serve an important role and are chosen in analyses conducted by politicians, researchers, and private institutions. In the long run, PPPs provide some insight into which way the exchange rate is likely to shift as the economy grows.
Constructing Purchasing Power Parity
A PPP ratio is calculated by taking a weighted average of the prices in both nations for a comparable basket of goods and services consumed by the average citizen in both countries (the weights representing the share of expenditure on each item in total expenditure). The PPP rate of exchange will be used to calculate the price ratio.
To compare living conditions between countries, indexes like the Big Mac Index and the KFC Index use the pricing of a Big Mac burger and a bucket of 12-15 pieces of chicken, respectively. These are fairly standardized products that comprise input costs from a variety of local economic sectors, making them appropriate for comparison.
Reliability of Purchasing Power Parity
PPP ratios, despite their widespread use, may not necessarily reflect a country’s true level of living for the following reasons:
- It’s possible that the underlying expenditure and price levels that represent consumption patterns aren’t accurately recorded.
- It’s difficult to compare diverse countries using identical baskets of products and services since people have varied interests and preferences, and the quality of the items varies.
- Because of trade prohibitions and other trade barriers, prices of traded items are rarely seen as equal, resulting in a departure from PPP.