Both Nominal GDP and PPP GDP gauge the size of an economy. For some, these two terms can be confusing. Each of them has qualities that help us measure an economy and compare it with others.
You have noticed that a cup of coffee costs you differently in various countries. Nominal GDP and PPP GDP help you compare these differences in several nations.
To help you understand why there are differences and how to compare them, I write about them and compare them in easily understandable words.
Nominal Gross Domestic Product (GDP)
Nominal Gross Domestic Product (GDP) refers monetary value of goods produced and services provided during a period within a geographic boundary at the current market price.
Understanding Nominal GDP is simple. The tag number you read on the label of products in the supermarkets displays the nominal price of items. The charge of a doctor for visiting a patient is another example of a nominal price for providing health care services.
Measuring the Nominal Gross Domestic Product (GDP) is easy. It is possible just by measuring from the reports of individuals and organizations.
Nominal Gross Domestic Product (GDP) Per Capita
GDP per capita expresses, on average, the share of every resident in a nation. To get the GDP per capita of a country, divide the total GDP by the number population. Or simply it is a simple average of income in a country.
GDP per capita states how rich or poor a country is, based on the average income of individuals in a country. A high GDP per capita represents a strong economy, and a low number a poor economy.
GDP per capita shows the average income in a nation, but it doesn’t elaborate on the distribution of wealth among citizens. GINI index is a better tool to understand the gap between rich and poor individuals in a country.
Gross Domestic Product (GDP) PPP
Gross Domestic Product Purchasing Power Parity (GDP PPP) shows; the purchasing power of the GDP converted to USD. USD is considered the international currency for comparing GDP PPP and GDP per capita PPP.
The World Bank produces the PPP data annually to gauge the size of economies.
Purchasing Power of USD as an international currency has the same as nominal USD in the United States. Or simply the USD and its purchasing power in the USA is considered the standard.
Purchasing Power Parity shows how much a certain amount of USD is needed to purchase a basket of goods and services in different nations. For example, a cup of coffee in Afghanistan costs $0.025, while a cup of coffee in the USA can cost up to 5 dollars, which means that money has more purchasing power in Afghanistan.
PPP illustrates how cheap or expensive the cost of living is in a country. As money transaction is handy, understanding PPP is helpful for expats and tourists to plan for their next adventures.
GDP PPP also indicates the true size of an economy as it is the best method to gauge the output of an economy.
The biggest economies computed based on GDP PPP are China, the USA, and India.
GDP per Capita PPP
GDP per Capita PPP shows the power of the International Dollar to purchase a basket of goods and services in a country. It is a metric to compare Purchasing Power Parity of individuals in different countries.
Higher the number shows how rich truly a country is.
Calculating GDP PPP
To calculate GDP Per Capita PPP, you need to consider a basket of goods and services. A single item can not represent the overall price differences among various nations. For example,
a laptop computer costs almost the same all over the world. You may find a tiny difference caused by different tariff rates, but the price does not differ too much.
To find how the calculation takes place, visit the official page of World Bank discussing the method.
Why the PPP varies among nations?
PPP indicates the cost of living in various nations.
PPP varies among countries because living conditions in various countries differ due to economic conditions, culture, geographical location, and so forth.
A basket of goods in a country that has many free trade agreements is cheaper than those countries that levy heavy tariffs on imported goods.
The cost of living in a country is cheaper that its unemployment rate is high compared to the US due to the low demand for goods and services.
The cost of living in a country that is bordered by cheap countries is cheaper than in those that are not. For instance, the cost of living in Singapore, which is bordered by cheap countries, is low than in Norway, even both are developed countries.