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Gross domestic product (GDP) is the market value of all final goods and services from a nation in a given year. [2] Countries are sorted by nominal GDP estimates from financial and statistical institutions, which are calculated at market or government official exchange rates. Nominal GDP does not take into account differences in the cost of ...
- Key Points
- Introduction
- Converting currencies with exchange rates
- GDP per capita
- Summary
- Self-check questions
- Review question
- Critical thinking questions
- Problems
•Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
•One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
It is common to use GDP as a measure of economic welfare or standard of living in a nation. When comparing the GDP of different nations for this purpose, two issues immediately arise.
First, the GDP of a country is measured in its own currency—the United States uses the US dollar; most countries of Western Europe use the euro; Japan uses the yen; and Mexico uses the peso. Because of this, comparing GDP between two countries requires converting to a common currency.
To compare the GDP of countries with different currencies, it is necessary to convert to a common denominator using an exchange rate, which is the value of one currency in terms of another currency.
Exchange rates are expressed either as the units of country A’s currency that need to be traded for a single unit of country B’s currency—for example, Japanese yen per British pound—or as the inverse—British pounds per Japanese yen. Two types of exchange rates can be used to compare GDPs: market exchange rates and purchasing power parity, or PPP, equivalent exchange rates.
Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign exchange markets. PPP-equivalent exchange rates provide a longer-run measure of the exchange rate. For this reason, PPP-equivalent exchange rates are typically used for cross-country comparisons of GDP.
[Try it out! Convert currencies to compare two countries' GDPs.]
The US economy has the largest GDP in the world, by a considerable amount. The United States is also a populous country. In fact, it is the third largest country by population in the world—although it's well behind China and India. So is the US economy larger than other countries' economies just because the United States has more people or because the US economy is actually larger on a per-person basis? This question can be answered by calculating countries' GDP per capita—the GDP divided by the population.
To calculate GDP per capita, we start with the formula below.
GDP per capita=GDP/population
We can use the table below to fill in the formula. The second column lists the GDP of various countries converted into US dollars. The third column gives the population for each country. The fourth column lists the GDP per capita—no cheating, don't look at this column yet!
GDP per capita is obtained in two steps:
1.Make sure your GDP and population numbers are in the same units. In our example, GDP is currently in billions, but population is in millions. We'll need to divide GDP by 1000 so it has the same units as population.
•Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
•One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?
[Show solution.]
The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681 CFA francs per dollar. Calculate the GDP per capita of Central African Republic.
[Show solution.]
What are the two main difficulties that arise in comparing the GDP of different countries?
•Cross-country comparisons of GDP per capita typically use purchasing power parity, PPP, equivalent exchange rates, which are a measure of the long-run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this article. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?
•Why might per capita GDP be only an imperfect measure of a country’s standard of living?
•Ethiopia has a GDP of 8 billion US dollars and a population of 55 million. Costa Rica has a GDP of 9 billion US dollars and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.
•In 1980, Denmark had a GDP of 70 billion US dollars and a population of 5.1 million. In 2000, Denmark had a GDP of 160 billion US dollars and a population of 5.3 million. By what percentage did Denmark’s GDP per capita rise between 1980 and 2000?
•The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 20 koruny per US dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in US dollars?
[Attribution]
GDP, or Gross Domestic Product, is the total monetary value of all goods and services produced and sold within a country during a specific time period, typically one year. . World's GDP is $100,562,000,000,000 (nominal, 2022) Sources: World Bank (World Development Indicators, July 25, 2023); United Nations (World Population Prospects 2022). #
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May 29, 2023 · This GDP indicator provides information on economic growth and income levels from 1990. This data is adjusted for inflation and for differences in the cost of living between countries. This data is expressed in international-$ at 2017 prices. Learn more in the FAQs.
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