How do you compare PPP of two countries? Check Answer at BYJU’S (2024)

FAQs

How do you compare PPP of two countries? Check Answer at BYJU’S? ›

It is done by equalizing the value of comparable market basket of goods between two countries. This equalizing exchange rate is the PPP exchange rate.

The PPP between economies B and A can be computed indirectly: PPP C/A × PPP B/C = PPP B/A. The use of both direct and indirect PPPs is a multilateral comparison. This means that the PPPs between any two economies are affected by their respective PPPs with other economies in the comparison.

One way to compare different countries' GDPs is with an exchange rate, the price of one country's currency in terms of another. GDP per capita is GDP divided by population.

Comparing GDPs of two countries

The usual method is to convert the value of GDP of each country into U.S. dollars and then compare them. Conversion to dollars can be done either using market exchange rates—those that prevail in the foreign exchange market—or purchasing power parity (PPP) exchange rates.

How many rupees to live $100,000 lifestyle? According to PPP, earnings of Rs 23 lakh in India will match an earning of Rs 65 lacs in the United Kingdom, Rs 37 Lacs in the UAE and Rs 79 lakh in the US. PPP is a theoretical concept and depends on the law of one price.

PPP allows economists to compare economic productivity and standards of living between countries. Some countries adjust their gross domestic product (GDP) figures to reflect PPP. Some feel that PPP does not reflect reality due to differences in local costs, taxes, tariffs, and competition.

"Income is an important criterion by which we can compare the developmental level of different countries or states".

Often, the objective is to compare one country's performance to others in order to assess what countries have achieved, what needs to change in order for them to perform better, or a country's progress in reaching certain objectives.

For comparison between countries, we consider the per capita income of each country. In World Development Report, countries are recognised as rich country and low-income country according to their per capita Income. With more income, people Will be able to get more things they need.

What is the best way to compare countries economies? ›

One way to do that is with the exchange rate, which is the price of one country's currency in terms of another. Once GDPs are expressed in a common currency, we can compare each country's GDP per capita by dividing GDP by population.

GDP is the measure most often used to assess the economic well-being of a country.

The idea of purchasing power parity dollars takes the idea of standardised income measures a step further by allowing us to compare incomes from the same country at different times, different countries at the same time, or different countries at different times.

Answer: per capita income is the most important components for comparing different countries.

Concept. Purchasing power parity is an economic term for measuring prices at different locations. It is based on the law of one price, which says that, if there are no transaction costs nor trade barriers for a particular good, then the price for that good should be the same at every location.

For measuring overall well-being, Purchasing Power Parity (PPP) is considered as a good indicator. China has the highest GDP (PPP). You can read about the Methods of GDP Estimation in the given link.

Using CPI to measure purchasing power

The Consumer Price Index (CPI)² is a measure of the average change in prices of goods and services that households consume over time. It's one of the most common economic indicators used to track inflation in specific economies.