The Difference Between GDP Nominal And GDPPPP"

Joe Kern!

Here is a rule of thumb to help in grasping the practical differences between GDP
Nominal and GDP PPP.!

GDP is gross domestic product, the total economic output of a country, i.e., the
amount of money a country makes.!

The two most common ways to measure GDP per capita are nominal and
purchasing power parity (abbreviated PPP). Nominal is an attempt at an absolute
measure, a sort of immovable standard that remains the same from country to
country. It is the original concept of GDP. You may also hear the term real GDP,
in which the amount of inflation has been subtracted from total GDP. In contrast,
PPP is an attempt at a relative measure, taking factors of each country into
consideration in order to put a number on a persons standard of living within that
country.!

Now, that explanation is a good start I suppose, but it is rather vague. Thats
where most explanations stop, so let me put it in more concrete terms that will
allow you to easily remember the difference.!

A trick for understanding GDPs PPP and nominal is that PPP is how much of a
local good (like real estate, labor, or locally grown produce) a person can buy in
their country. Nominal is roughly how much of an internationally traded good
(diamonds, DVD players, Snickers bars) a person can buy in their country.!

Developing countries tend to have a higher (better) PPP than nominal, while
developed countries have higher nominal than PPP. You can get dinner for $10
or a DVD player for $100 in the US, or you can get dinner for $2 or a DVD player
for $100 in China. If you compare a man from China making $20 a day to an
American making $150 a day, the Chinese man is slightly poorer in dinners than
the American (1/10 of income versus 1/15), but is a lot poorer in DVD players
than the American (5x income versus 2/3 of income). The Chinese man spent a
larger percentage of his income on food (compared with the American) making
the Chinese man poorer and reducing his ability to buy dinner for himself. See
how that works?!

Nominal and PPP are identical in the US, because USD is used as the
benchmark. But in all of the most developed countries except the US, the
nominal is higher.!

Another way to think about this is that, as a countrys citizens get richer and
richer, they are more easily able to acquire international goods, but any good that
must be provided by others of its own rich citizens, like college education, health
care, taxis, etc. is going to get more expensive.!

Heres some of the stats (in USD), taken from Wikipedia in the fall of 2009:!
US PPP and Nom. 46,800
UK PPP 36,500 Nom. 43,700
Japan PPP 34,000 Nom. 38,000
Sweden PPP 37,200 Nom. 52,800
Canada PPP 38,025 Nom. 39,668
Australia PPP 38,910 Nom. 45,586
N. Zealand PPP 26,707 Nom. 27,259
S. Korea PPP 27,600 Nom. 19,500
Saudi Ar. PPP 23,814 Nom. 18,855
Russia PPP 15,948 Nom. 11,807
Mexico PPP 14,534 Nom. 10,212
Brazil PPP 10,455 Nom. 7737
Dominican R. PPP 8896 Nom. 5176
China PPP 6549 Nom. 3554
Bolivia PPP 4300 Nom. 1700
Vietnam PPP 2793 Nom. 1042
Kenya PPP 1711 Nom. 838
Haiti PPP 1317 Nom. 790
DR Congo PPP 329 Nom. 185!

I think this bears my explanation out. A Bolivian can buy almost nothing of
international goods and services, but because his countrymen are also poor, he
can buy whatever they are able to provide much easier. A Swede is very rich in
international money, richer than an American, but their relatively high level of
socialism and income equality means they are poorer than an American as far as
what they can get in their own country.!

!
!
!
!
!
!
!
!

https://applebutterdreams.wordpress.com/the-difference-between-gdp-nominaland-gdp-ppp/