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What is difference between nominal GDP and PPP GDP? Why is India ranked higher in PPP GDP calculation?

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posted Dec 8, 2014 by Amit Kumar Pandey

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1 Answer

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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. In contrast, PPP GDP is an attempt at a relative measure, taking factors of each country into consideration in order to put a number on a person’s standard of living within that country.

A rule of thumb for understanding GDP’s 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, and nominal is roughly how much of an internationally traded good (diamonds, DVD players, Snickers bars) a person can buy in their country.

Thus, 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 India. If you compare a Indian making $20 a day to an American making $100 a day, then Indian and American are at same level in dinners (1/10 of income), but is poorer in DVD players than the American.

Now cutting the long story sort we make the basket of the goods of a country and bring them to the international stand by adjusting for the comparable cost to calculate the GDP side.

India ranked higher should be automatically clear with above description.

Note: Nominal and PPP are identical in the US, because USD is used as the benchmark.

answer Dec 9, 2014 by Salil Agrawal
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