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.
With an example, what is PPP GDP?
Purchasing power parity is an economic phrase that refers to the comparison of prices in different places. It is based on the law of one price, which states that if an item has no transaction costs or trade obstacles, its price should be the same everywhere. In an ideal world, a computer in New York and Hong Kong should cost the same. If a computer costs $500 in New York and 2,000 HK dollars in Hong Kong, according to PPP theory, the exchange rate should be 4 HK dollars for every 1 US dollar.
Poverty, taxes, transportation, and other frictions make it difficult to trade and buy a variety of items, so measuring only one can result in a big error. The PPP phrase accommodates for this by utilizing a basket of products, which consists of a variety of goods in various quantities. The ratio of the price of the basket in one location to the price of the basket in the other location is then computed using PPP as an inflation and exchange rate. If a basket containing one computer, one ton of rice, and one ton of steel costs 1,800 US dollars in New York and 10,800 HK dollars in Hong Kong, the PPP exchange rate is 6 HK dollars for every 1 US dollar.
The concept behind purchasing power parity is that with the proper exchange rate, consumers in all locations will have the same purchasing power.
The PPP exchange rate’s value is highly reliant on the goods basket chosen. In general, commodities that closely follow the law of one price are picked. As a result, ones are freely traded and widely available in both regions. Organizations that calculate PPP exchange rates utilize a variety of product baskets and can come up with a variety of results.
The PPP exchange rate may differ from the market rate. Because it reacts to variations in demand at each place, the market rate is more volatile. Tariffs and wage differentials (see BalassaSamuelson theorem) can also contribute to longer-term discrepancies between the two rates. PPP can be used to forecast longer-term exchange rates.
PPP exchange rates are utilized for many international comparisons, such as comparing countries’ GDPs or other national income figures, because they are more stable and less impacted by tariffs. These figures are frequently labeled as PPP-adjusted.
Purchasing power adjusted incomes and incomes translated using market exchange rates can differ significantly. The GearyKhamis dollar is a well-known buying power adjustment (the international dollar). According to the World Bank’s World Development Indicators 2005, one GearyKhamis dollar was worth around 1.8 Chinese yuan by purchasing power parity in 2003, a significant difference from the nominal exchange rate. This disparity has significant ramifications; for example, when converted using nominal exchange rates, India’s GDP per capita is roughly US$1,965, whereas it is about US$7,197 on a PPP basis. Denmark’s nominal GDP per capita is roughly US$53,242, but its PPP figure is US$46,602, which is comparable to other wealthy countries.
What exactly is the distinction between GDP and GDP 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.
Is a high PPP beneficial?
As a result, PPP is widely viewed as a more accurate indicator of overall happiness. PPP’s disadvantages include: The most significant disadvantage is that PPP is more difficult to calculate than market-based rates. The ICP is a massive statistical project, and new pricing comparisons are only released seldom.
What does it mean to have a high PPP?
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.
In basic terms, what is PPP?
PPPs are currency conversion rates that eliminate pricing discrepancies across countries, thereby equating the purchasing power of different currencies. PPPs are essentially price relatives that reflect the ratio of prices in national currencies of the same commodity or service in different nations in their most basic form. PPPs are calculated for product categories as well as for each level of aggregation up to and including GDP.
What is the India PPP?
India’s GDP per capita based on PPP was 6,461 international dollars in 2020. India’s GDP per capita increased from 2,022 international dollars in 2001 to 6,461 international dollars in 2020, expanding at a 6.39 percent annual pace.
In 2021, what would India’s GDP be?
In its second advance estimates of national accounts released on Monday, the National Statistical Office (NSO) forecasted the country’s growth for 2021-22 at 8.9%, slightly lower than the 9.2% estimated in its first advance estimates released in January.
Furthermore, the National Statistics Office (NSO) reduced its estimates of GDP contraction for the coronavirus pandemic-affected last fiscal year (2020-21) to 6.6 percent. The previous projection was for a 7.3% decrease.
In April-June 2020, the Indian economy contracted 23.8 percent, and in July-September 2020, it contracted 6.6 percent.
“While an adverse base was expected to flatten growth in Q3 FY2022, the NSO’s initial estimates are far below our expectations (6.2 percent for GDP), with a marginal increase in manufacturing and a contraction in construction that is surprising given the heavy rains in the southern states,” said Aditi Nayar, Chief Economist at ICRA.
“GDP at constant (2011-12) prices is estimated at Rs 38.22 trillion in Q3 of 2021-22, up from Rs 36.26 trillion in Q3 of 2020-21, indicating an increase of 5.4 percent,” according to an official release.
According to the announcement, real GDP (GDP) or Gross Domestic Product (GDP) at constant (2011-12) prices is expected to reach Rs 147.72 trillion in 2021-22, up from Rs 135.58 trillion in the first updated estimate announced on January 31, 2022.
GDP growth is expected to be 8.9% in 2021-22, compared to a decline of 6.6 percent in 2020-21.
In terms of value, GDP in October-December 2021-22 was Rs 38,22,159 crore, up from Rs 36,22,220 crore in the same period of 2020-21.
According to NSO data, the manufacturing sector’s Gross Value Added (GVA) growth remained nearly steady at 0.2 percent in the third quarter of 2021-22, compared to 8.4 percent a year ago.
GVA growth in the farm sector was weak in the third quarter, at 2.6 percent, compared to 4.1 percent a year before.
GVA in the construction sector decreased by 2.8%, compared to 6.6% rise a year ago.
The electricity, gas, water supply, and other utility services segment grew by 3.7 percent in the third quarter of current fiscal year, compared to 1.5 percent growth the previous year.
Similarly, trade, hotel, transportation, communication, and broadcasting services expanded by 6.1 percent, compared to a decline of 10.1 percent a year ago.
In Q3 FY22, financial, real estate, and professional services growth was 4.6 percent, compared to 10.3 percent in Q3 FY21.
During the quarter under examination, public administration, defense, and other services expanded by 16.8%, compared to a decrease of 2.9 percent a year earlier.
Meanwhile, China’s economy grew by 4% between October and December of 2021.
“India’s GDP growth for Q3FY22 was a touch lower than our forecast of 5.7 percent, as the manufacturing sector grew slowly and the construction industry experienced unanticipated de-growth.” We have, however, decisively emerged from the pandemic recession, with all sectors of the economy showing signs of recovery.
“Going ahead, unlock trade will help growth in Q4FY22, as most governments have eliminated pandemic-related limitations, but weak rural demand and geopolitical shock from the Russia-Ukraine conflict may impair global growth and supply chains.” The impending pass-through of higher oil and gas costs could affect domestic demand mood, according to Elara Capital economist Garima Kapoor.
“Strong growth in the services sector and a pick-up in private final consumption expenditure drove India’s real GDP growth to 5.4 percent in Q3.” While agriculture’s growth slowed in Q3, the construction sector’s growth became negative.
“On the plus side, actual expenditure levels in both the private and public sectors are greater than they were before the pandemic.
“Given the encouraging trends in government revenues and spending until January 2022, as well as the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out better than what the (federal) budget projected,” said Rupa Rege Nitsure, group chief economist, L&T Financial Holdings.
“The growth number is pretty disappointing,” Sujan Hajra, chief economist of Mumbai-based Anand Rathi Securities, said, citing weaker rural consumer demand and investments as reasons.
After crude prices soared beyond $100 a barrel, India, which imports virtually all of its oil, might face a wider trade imbalance, a weaker rupee, and greater inflation, with a knock to GDP considered as the main concern.
“We believe the fiscal and monetary policy accommodation will remain, given the geopolitical volatility and crude oil prices,” Hajra added.
According to Nomura, a 10% increase in oil prices would shave 0.2 percentage points off India’s GDP growth while adding 0.3 to 0.4 percentage points to retail inflation.
Widening sanctions against Russia are likely to have a ripple impact on India, according to Sakshi Gupta, senior economist at HDFC Bank.
“We see a 20-30 basis point downside risk to our base predictions,” she said. For the time being, HDFC expects the GDP to rise 8.2% in the coming fiscal year.
What do PPP dollars mean?
Purchasing power parities (PPPs) are currency conversion rates that attempt to equalize the purchasing power of various currencies by removing price discrepancies across countries. The basket of products and services priced is a representative sample of all those that make up final expenditures: household and government final consumption, fixed capital creation, and net exports. This metric is expressed as a national currency per US dollar.
How do you compare two countries’ PPPs?
The most common use of purchasing power parity (PPP) exchange rates is to compare income, wages, and gross domestic product (GDP) among countries (GDP). Let’s imagine we want to compare the per capita GDP of two countries, such as the United States and China. In 2004, the US GDP was around $12 trillion, whereas China’s GDP was around $16 trillion. With a population of 290 million people, the United States’ GDP per capita is $41,400 per person. In 2004, China’s population was estimated to be over 1.3 billion people, resulting in a GDP per capita of 11,500 yuan (). However, because the two per capita data are in different unitsdollars and yuanwe can’t compare them. As a result, we must convert units, either dollars to yuan or yuan to dollars.
The most straightforward way to accomplish this conversion is to utilize the spot exchange rate of 8.28 yuan per dollar in 2004. China’s per capita GDP is $1,390 when converted from yuan to dollars. It’s worth noting that the US per capita GDP was about thirty times more than China’s, at $41,400 per person.
However, there is a drawback to this approach. When Americans visit in and around China, they rapidly notice that many items and services appear to be far less expensive than in the United States. Many American things might appear to be significantly more expensive to a Chinese traveler. The inference is that, despite the fact that US GDP per person is thirty times larger, that money will not be able to buy thirty times more products and services in the US since US goods and services are so much more expensive when converted at the current exchange rate. Since we’re likely comparing per capita GDPs to see how they compare, “These per capita estimates will not truly reflect how “well-off” individuals are in one country compared to another.
The purchasing power parity theory provides a solution (PPP). We would say the US dollar is overpriced in terms of the yuan and PPP when prices for similar commodities differ as mentioned in the preceding paragraph. Simultaneously, we believe the yuan is undervalued in comparison to the dollar. Using the PPP exchange rate in the conversion is one technique to achieve comparable (or equalized) values of commodities and services between countries. The PPP exchange rate is the rate at which the value of similar market baskets of goods and services in two nations would be equalized.
For instance, in 2004, the anticipated PPP exchange rate between the US dollar and the yuan was 1.85/$. If this exchange rate had prevailed between the countries, the prices of American goods would appear to be roughly equivalent to those in China on average. Now, if we use this exchange rate to convert China’s GDP per capita to dollars, we’ll receive a value that reflects the purchasing power of Chinese income in terms of US pricesthat is, prices that are equalized between the two countries.
Thus, we get $6,250 per person if we take China’s GDP per capita of 11,500 and convert it to dollars using the PPP exchange rate. The units obtained from this statement are commonly referred to as “Western Union Dollars.” This indicates that $11,500 will buy a package of goods and services in China that would cost $6,250 if purchased at current US prices. In other words, when the costs of products and services are equalized between countries, $11,500 equals $6,250.
The PPP method of conversion is a considerably more accurate technique of comparing values between countries across borders. Although China’s per capita GDP was still significantly smaller than that of the United States ($6,250 vs. $41,400), it was still four and a half times greater than the spot exchange rate ($6,250 vs. $1,390) in this scenario. The higher value accounts for price disparities between nations and so better reflects differences in per capita GDP purchasing power.
The World Bank and others have adopted the PPP conversion method for making cross-country comparisons of GDP, GDP per capita, and average incomes and wages. PPP is a more accurate measure for most comparisons involving the size of economies or living standards, and it can radically affect our perspective of how countries compare. Consider Table 6.1, “GDP Rankings (in Billions of Dollars), 2008,” which was compiled using World Bank statistics. It displays a ranking of the top ten countries in terms of total GDP, converted into dollars using both the current exchange rate and the PPP methods.
What is the formula for PPP?
The exchange rate of two different currencies in equilibrium is referred to as purchasing power parity. The PPP formula is computed by multiplying the cost of a product or service in one currency by the cost of the same products or services in another currency.
The economic theory that argues that the exchange rate of two currencies will be in equilibrium or at par with the ratio of their respective purchasing powers is known as “purchasing power parity.” By dividing the cost of a given good basket (e.g., good X) in nation 1 in currency 1 by the cost of the same item in country 2 in currency 2, the formula for purchasing power parity of country 1 vs. country 2 may be derived.