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By the end of this section, you will be able to:

  • Explain how GDP can be used to compare the economic welfare of different nations
  • Calculate the conversion of GDP to a common currency by using exchange rates
  • Calculate GDP per capita using population data

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, the GDP of a country is measured 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 roughly three times as many people as Mexico and nine times as many people as Canada. So, if we are trying to compare standards of living across countries, we need to divide GDP by population.

Converting currencies with exchange rates

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. Exchange rates are expressed 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). Two types of exchange rates can be used for this purpose, market exchange rates and purchasing power parity (PPP) 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, PPP-equivalent exchange rates are typically used for cross country comparisons of GDP. Exchange rates will be discussed 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.

Converting gdp to a common currency

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 $ U.S.  =  Brazil's GDP in reals 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 [link] which shows the size of and variety of GDPs of different countries in 2013, all expressed in U.S. dollars. Each is calculated using the process explained above.

(Source: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx)
Comparing gdps across countries, 2013
Country GDP in Billions of Domestic Currency Domestic Currency/U.S. Dollars (PPP Equivalent) GDP (in billions of U.S. dollars)
Brazil 4,844.80 reals 2.157 2,246.00
Canada 1,881.20 dollars 1.030 1,826.80
China 58,667.30 yuan 6.196 9,469.10
Egypt 1,753.30 pounds 6.460 271.40
Germany 2,737.60 euros 0.753 3,636.00
India 113,550.70 rupees 60.502 1,876.80
Japan 478,075.30 yen 97.596 4,898.50
Mexico 16,104.40 pesos 12.772 1,260.90
South Korea 1,428,294.70 won 1,094.925 1,304.467
United Kingdom 1,612.80 pounds 0.639 2,523.20
United States 16,768.10 dollars 1.000 16,768.10

Questions & Answers

how to print
Siti Reply
what is flow variable
Siyanda Reply
a flow is a quantity that can be measured over a specific period of time
Abhishek
is economics a social science or a pure science
Hilda Reply
social science
Sammy
social science
Babarali
social Science as a Subject and Pure science as a study
Abhishek
How to compute National income by using the expenditure approach
Bridget Reply
explain the method?
Sammy
hy
Sajjad
C+I+G+(X-M) C= Consumption Expenditure I= Investment Expenditure G= Government Expenditure X-M = Net Export
Abhishek
hw r u..?
Sharat
am good
lukimia
o nice
Sajjad
please I need a guardian on this topic
Albert
What do you need? Maybe we can help
Annisa
What's going on here?
Ivan
l need some information about macroeconomic
Sharat
First tell us what you already know about macroeconomic.
Ivan
any lecturer in here?
Albert
yes !! am here !! Lecturer of Economics And Statistics
Abhishek
Macroeconomics is too vast,so please be specific your question
niguse
Briefly explain whether the discipline of economics is a social science or pure science( normative or positive)
Okafor Reply
answer.... Economics is social science
Sammy
different between absolute advantage and comparative advantage
EDSON Reply
mathematical economics
masele Reply
show some questions under this topic
hassan
why met worth is added with libilitys in the balance sheet
bijoy Reply
what are the implications of inflation targeting?
Alinaitwe Reply
maximize profit
Murry
What happens to the goods and money market if the government cuts public spending?
Harman Reply
then the government will be punished by the public
soul
GDP, INFLATION, UNEMPLOYMENT & PRODUCTIVITY and then write a paragraph on the behavior of each variable after analyzing them graphically.
AWY
what is international trade
Stella Reply
International trade is the exchange of capital, goods, and services across international borders.
Bilal
international trade is the exchange of goods and services across boundaries
Zamu
international trade is the exchange of goods and services of country and abroad
Uwase
international is the process of exchanges of value interm of goods and services along national frontier
Murry
Trade*
Murry
Increase knowdge and skill. it save time and cost. Increase high Efficiency of production .
betta Reply
List kinds of Elastcity of Demand
betta
Is a faster rate of economic growth always a good thing as compared to a slower rate? And why?
LIMPHO Reply
what is unemployment
Doctor Reply
it is a situation during which workers remain jobless.
Zeeshan
is situation where people are willing to work but job are no available
Uwase
what is inflation
Sheila Reply
Inflation is a major concern to global economists, and it affects people from all walks of life. It refers to the measure or rate by which the cost of goods and services rises and purchasing power declines. As prices increase, monetary value decreases—prompting consumers to spend less on goods and s
King
inflation is the persistence rise in price level
Zamu
Inflation is the situation during which too much money is required to purchase too few goods.
Zeeshan
inflation is continuous increase in general price level
Uwase
it is the process where too much money pursuing fewer goods
Murry

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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