Comparing GDP among Countries Quiz

PDF page 134: 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, we measure a country's GDP in its own currency: the United States uses the U.S. dollar; Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen; Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting to a common currency. A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has almost three times as many people as Mexico and nine times as many people as Canada. Thus, if we are trying to compare standards of living across countries, we need to divide GDP by population.

PDF page 134: 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, we measure a country's GDP in its own currency: the United States uses the U.S. dollar; Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen; Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting to a common currency. A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has almost three times as many people as Mexico and nine times as many people as Canada. Thus, if we are trying to compare standards of living across countries, we need to divide GDP by population.

PDF page 134: 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, we measure a country's GDP in its own currency: the United States uses the U.S. dollar; Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen; Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting to a common currency. A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has almost three times as many people as Mexico and nine times as many people as Canada. Thus, if we are trying to compare standards of living across countries, we need to divide GDP by population.

PDF page 134: 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. We express exchange rates 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 (for example, British pounds per Japanese yen). We can use two types of exchange rates for this purpose, market exchange rates and purchasing power parity (PPP)

PDF page 135: 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, economists typically use PPP-equivalent exchange rates for GDP cross country comparisons. We will discuss exchange rates in more detail in Exchange Rates and International Capital Flows. The following Work It Out feature explains how to convert GDP to a common currency.

PDF page 134: 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. We express exchange rates 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 (for example, British pounds per Japanese yen). We can use two types of exchange rates for this purpose, market exchange rates and purchasing power parity (PPP)

PDF page 135: 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, economists typically use PPP-equivalent exchange rates for GDP cross country comparisons. We will discuss exchange rates in more detail in Exchange Rates and International Capital Flows. The following Work It Out feature explains how to convert GDP to a common currency.

PDF page 135: Using the exchange rate to convert GDP from one currency to another is straightforward. Say that the task is to compare Brazil’s GDP in 2013 of 4.8 trillion reals with the U.S. GDP of $16.6 trillion for the same year. Step 1. Determine the exchange rate for the specified year. In 2013, the exchange rate was 2.230 reals = $1. (These numbers are realistic, but rounded off to simplify the calculations.) Step 2. Convert Brazil’s GDP into U.S. dollars: Brazil's GDP in reals Brazil's GDP in $ U.S. = Exchange rate (reals/$ U.S.) 4.8 trillion reals = 2.230 reals per $ U.S. = $2.2 trillion Step 3. Compare this value to the GDP in the United States in the same year. The U.S. GDP was $16.6 trillion in 2013, which is nearly eight times that of GDP in Brazil in 2012. Step 4. View Table 5.8 which shows the size of and variety of GDPs of different countries in 2013, all expressed in U.S. dollars. We calculate each using the process that we explained above.

PDF page 135: Using the exchange rate to convert GDP from one currency to another is straightforward. Say that the task is to compare Brazil’s GDP in 2013 of 4.8 trillion reals with the U.S. GDP of $16.6 trillion for the same year. Step 1. Determine the exchange rate for the specified year. In 2013, the exchange rate was 2.230 reals = $1. (These numbers are realistic, but rounded off to simplify the calculations.) Step 2. Convert Brazil’s GDP into U.S. dollars: Brazil's GDP in reals Brazil's GDP in $ U.S. = Exchange rate (reals/$ U.S.) 4.8 trillion reals = 2.230 reals per $ U.S. = $2.2 trillion Step 3. Compare this value to the GDP in the United States in the same year. The U.S. GDP was $16.6 trillion in 2013, which is nearly eight times that of GDP in Brazil in 2012. Step 4. View Table 5.8 which shows the size of and variety of GDPs of different countries in 2013, all expressed in U.S. dollars. We calculate each using the process that we explained above.

PDF page 136: The U.S. 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 well behind China and India. Is the U.S. economy larger than other countries just because the United States has more people than most other countries, or because the U.S. economy is actually larger on a per-person basis? We can answer this question by calculating a country’s GDP per capita; that is, the GDP divided by the population. GDP per capita = GDP/population The second column of Table 5.9 lists the GDP of the same selection of countries that appeared in the previous Tracking Real GDP over Time and Table 5.8, showing their GDP as converted into U.S. dollars (which is the same as the last column of the previous table). The third column gives the population for each country. The fourth column lists the GDP per capita. We obtain GDP per capita in two steps: First, by multiplying column two (GDP, in billions of dollars) by 1000 so it has the same units as column three (Population, in millions). Then divide the result (GDP in millions of dollars) by column three (Population, in millions).

PDF page 136: The U.S. 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 well behind China and India. Is the U.S. economy larger than other countries just because the United States has more people than most other countries, or because the U.S. economy is actually larger on a per-person basis? We can answer this question by calculating a country’s GDP per capita; that is, the GDP divided by the population. GDP per capita = GDP/population The second column of Table 5.9 lists the GDP of the same selection of countries that appeared in the previous Tracking Real GDP over Time and Table 5.8, showing their GDP as converted into U.S. dollars (which is the same as the last column of the previous table). The third column gives the population for each country. The fourth column lists the GDP per capita. We obtain GDP per capita in two steps: First, by multiplying column two (GDP, in billions of dollars) by 1000 so it has the same units as column three (Population, in millions). Then divide the result (GDP in millions of dollars) by column three (Population, in millions).

PDF page 136: GDP (in billions of U.S. Population (in Per Capita GDP (in U.S. Country dollars) millions) dollars) Brazil 2,246.00 199.20 11,275.10 Canada 1,826.80 35.10 52,045.58 China 9,469.10 1,360.80 6,958.48 Egypt 271.40 83.70 3,242.90 Germany 3,636.00 80.80 44,999.50 India 1,876.80 1,243.30 1,509.50 Japan 4,898.50 127.3 38,479.97 Mexico 1,260.90 118.40 10,649.90 South Korea 1,304.47 50.20 25,985.46 United 2,523.20 64.10 39,363.50 Kingdom United 16,768.10 316.30 53,013.28 States

PDF page 137: Notice that the ranking by GDP is different from the ranking by GDP per capita. India has a somewhat larger GDP than Germany, but on a per capita basis, Germany has more than 10 times India’s standard of living. Will China soon have a better standard of living than the U.S.? Read the following Clear It Up feature to find out.