Nominal GDP vs PPP GDP

If someone asks you what's India's standing in terms of GDP, what will be your answer?
   (Image source: Wikipedia, 2019)
Before answering you must ask whether it's in terms of PPP or Nominal GDP?
Let's start with basics and understand what is GDP?

Gross Domestic Product (GDP) is the total market value of all the finished goods and services produced within a country's border in a specific time period.
Example: Say we live in a hypothetical country "Mi amor" and it has produced 10 chocolates worth Rs 10 each, and 15 cakes worth Rs 20 each in the year 2018. 
So the GDP of the country "Mi amor" in 2018 was: Rs 10*10 + Rs 15*20 = Rs 400.
Now say "Mi amor" has produced 11 chocolates worth Rs 10 each and 16 cakes worth Rs 20 each in the year 2019.
The GDP of the country in the year 2019 is Rs 11*10+16*20 = Rs 430.
So, the GDP growth for the year 2019 is: (430-400)*100/400 = 7.5% (An increase in Rs 30 from the base year 2018).

 I hope you got the tinch of GDP and GDP growth rate.

 Every country has its own currency like India-Rupee, China-Yuan, US-US dollars, Russia-Russian ruble. 

 How do we compare the GDP of different countries?

 We convert the GDP of every country into a common currency generally US dollars.

How do we convert GDP into a common currency?

 There are two methods:

1) Nominal Exchange Rate.

The current exchange rate is 1 US dollar = Rs 75.52 i.e Re 1= 0.013 US dollars. To convert India's GDP into US $ we multiply the GDP of India with the current exchange rate i.e GDP in USD = GDP in Rs * 0.013.
The GDP calculated in US dollars using this method is called Nominal GDP.

2) Purchasing Power Parity (PPP).

Earning equal amount of money in the US and India doesn't guarantee you an equal standard of living because the price of an apple in the US is different than that of India, here comes the concept of purchasing power. 
Say 1 Kg of apple cost Rs 100 in India i.e Rs 100 = 1 Kg apple.
Say 1 Kg of apple cost USD 20 in America i.e $ 20 = 1 Kg apple.
So using the above two synopses we can say that Rs 100 = $ 20 i.e Re 1 = $ 0.2
GDP in USD = GDP in Rs * 0.2.
The GDP calculated in US dollars using this method is called GDP (PPP).

 So, according to IMF's 2019 data, India ranks 3rd in terms of PPP GDP and 5th in terms of Nominal GDP.

Comments

  1. UnknownMay 21, 2020 at 11:22 AM

    Sb smjh gye

    ReplyDelete
  2. Roshan KrrMay 21, 2020 at 8:57 PM

    Why such variations?

    ReplyDelete
    Replies
    1. MayankMay 21, 2020 at 11:03 PM

      I didn't get your question can you please elaborate nevertheless I'll explain whatever I understood from you question.
      The variations in GDP are generally because these are 2 different methods, nominal exchange rate is calculated using the demand and supply equilibrium concept where we price one currency against another while PPP is solely based on the equivalency of the price of a basket of good.

      Delete

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