What Is GDP Purchasing Power Parity?
GDP purchasing power parity (PPP) is a means of assessing an economy's true value, not just its dollar value. It does this by compensating for the fact that the cost of living--and therefore production--is different around the world.
Other People Are Reading
-
GDP
-
Gross domestic product (GDP) is the total value of all the goods and services produced within a country. So, a factory adds to a country's GDP, as does a mechanic, farmer, bungee jump operator, and elevator technician.
PPP
-
Since some economies have very low costs of living, their GDP may be small even though they are actually producing a great deal at an increasing rate. The converse may also be true.
-
Example
-
The best way to explain this is through an example. Say a certain brand of shoes costs $10 per pair in the USA. A shoe factory in a developing country produces 100 pairs a week, which are sold for $1 each. A shoe maker in a higher-developed country, on the other hand, makes one pair of the same shoes every week, which he sells in his own country for $100. Both of these countries' raw GDP is $100 (100 x 1; 1 x 100), but the U.S. dollar values are respectively $100 and $10.
This means that the developing country is actually doing substantially better, because it has produced goods worth $1000 in the USA ($10 x 100 pairs of shoes) while the shoemaker, who only produced one pair of shoes, has only produced $10 of U.S. value ($10 x 1 pair of shoes).
-
References
- Photo Credit money money money image by Tribalstar from Fotolia.com
