# Comparing GDP among countries

## Key Points

• Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
• One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
• GDP per capita is GDP divided by population.

## Introduction

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 US dollar; most countries of Western Europe use the euro; Japan uses the yen; and Mexico uses the peso. Because of this, 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—British pounds per Japanese yen. Two types of exchange rates can be used to compare GDPs: market exchange rates and purchasing power parity, or 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.
Now's your chance to actually use an exchange rate to convert GDP from one currency to another. Let's figure out how to compare Brazil’s GDP in 2013—4.8 trillion reals—with the US GDP of 16.6 trillion US dollars for the same year.
Step 1. Determine the exchange rate for the specified year. In 2013, the exchange rate was 2.230 reals to 1 dollar. Note: These numbers are realistic, but rounded off to simplify the calculations.
Step 2. Convert Brazil’s GDP into US dollars.
$\text{Brazil's GDP in US dollars} = \frac{\text{Brazil's GDP in reals}}{\text{Exchange rate of reals to US dollars}}$
$\text{Brazil's GDP in US dollars} = \frac{4.8 \text{ trillion reals}}{2.230\text{ reals per US dollar}}$
$\text{Brazil's GDP in US dollars} = 2.2 \text{ trillion dollars}$

## Summary

• Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
• One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
• GDP per capita is GDP divided by population.

## Self-check questions

Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?
Yes and yes. The answer to both questions depends on whether GDP is growing faster or slower than population. If population grows faster than GDP, GDP increases while GDP per capita decreases. If GDP falls, but population falls faster, then GDP decreases while GDP per capita increases.
The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681 CFA francs per dollar. Calculate the GDP per capita of Central African Republic.
Start with the Central African Republic’s GDP measured in francs. Divide it by the exchange rate to convert to US dollars, and then divide by population to obtain the per capita figure.
$1,107,689 \text{ million francs} / 284.681 \text{ francs per dollar} / 4.862 \text{ million people} = \800.28 \text{ GDP per capita}$

## Review question

What are the two main difficulties that arise in comparing the GDP of different countries?

## Critical thinking questions

• Cross-country comparisons of GDP per capita typically use purchasing power parity, PPP, equivalent exchange rates, which are a measure of the long-run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this article. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?
• Why might per capita GDP be only an imperfect measure of a country’s standard of living?

## Problems

• Ethiopia has a GDP of 8 billion US dollars and a population of 55 million. Costa Rica has a GDP of 9 billion US dollars and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.
• In 1980, Denmark had a GDP of 70 billion US dollars and a population of 5.1 million. In 2000, Denmark had a GDP of 160 billion US dollars and a population of 5.3 million. By what percentage did Denmark’s GDP per capita rise between 1980 and 2000?
• The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 20 koruny per US dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in US dollars?