Question

Many people use per capita GDP – GDP divided by the population in a country – to compare the level of development and average living standards in countries. This is measured in dollars to make comparison possible. What is the difference between the nominal per capita GDP and PPP per capita GDP. If PPP per capita GDP is higher than the nominal number, does this imply that a country’s currency is over- or under-valued.

Answer 1

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. GDP functions as a overall reportcard for a country's economic health.

Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, it helps in making decisions with regards to international comparisons. It is considered as the benchmark concept of GDP .Exchange rates play an important role in this method .Unlike the cost of living, Nominal method only takes into account the exchange rates for conversion and comparison. Fluctuations in the exchange rates of the country's currency may change a country's ranking from one year to the next, even though they often make little or no difference to the standard of living of its population.

PPP are usually more useful when comparing differences in living standards between nations. For eg. An accesorry or clothing item is USA is more expensive than in Lima, The price of the bus ticket for a same distance will be higher in Italy than in Ethiopia. PPP is an exchange rate at which the currency of one country is converted into that of the second country in order to purchase the same volume of goods and services in both countries. If a Pizza is sold  in London for £2 and in New York for $4, this would imply a PPP exchange rate of 1 pound to 2 U.S. dollars. PPP exchange rates are relatively stable over time..