Chapter 3. The Macroeconomic Perspective
3.4 Comparing GDP among Countries
Learning Objectives
By the end of this section, you will be able to:
- Explain how we can use GDP 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, we measure a country’s GDP 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 almost three times as many people as Mexico and nine times as many people as Canada. Thus, 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. We express exchange rates 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). We can use two types of exchange rates 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, economists typically use PPP-equivalent exchange rates for GDP cross country comparisons. We will discuss exchange rates in more detail in Exchange Rates and International Capital Flows.
GDP Per Capita
The U.S. economy has the largest GDP in the world, by a considerable amount. The United States is also a populous country; in fact, it is the third largest country by population in the world, although well behind China and India. Is the U.S. economy larger than other countries just because the United States has more people than most other countries, or because the U.S. economy is actually larger on a per-person basis? We can answer this question by calculating a country’s GDP per capita; that is, the GDP divided by the population.
The second column of Table 3.8 lists the GDP of the same selection of countries that appeared in the previous Tracking Real GDP over Time and Table 3.7, showing their GDP as converted into U.S. dollars (which is the same as the last column of the previous table). The third column gives the population for each country. The fourth column lists the GDP per capita. We obtain GDP per capita in two steps: First, by multiplying column two (GDP, in billions of dollars) by 1000 so it has the same units as column three (Population, in millions). Then divide the result (GDP in millions of dollars) by column three (Population, in millions).
| Country | GDP (in billions of U.S. dollars) | Population (in millions) | Per Capita GDP (in U.S. dollars) |
|---|---|---|---|
| Brazil | 1,608.08 | 212.61 | 7,563.56 |
| Canada | 1,990.76 | 38.23 | 52,078.52 |
| China | 17,458.04 | 1,412.60 | 12,358.80 |
| Egypt | 402.84 | 102.61 | 3,925.83 |
| Germany | 4,225.92 | 83.20 | 50,794.95 |
| India | 3,041.99 | 1,392.01 | 2,185.32 |
| Japan | 4,937.42 | 125.51 | 39,339.84 |
| Mexico | 1,294.83 | 128.97 | 10,039.78 |
| South Korea | 1,7898.54 | 51.68 | 34,801.09 |
| United Kingdom | 3,187.63 | 67.53 | 47,202.58 |
| United States | 22,997.50 | 332.18 | 69,231.40 |
Notice that the ranking by GDP is different from the ranking by GDP per capita. India has a somewhat smaller GDP than Germany, but on a per capita basis, Germany has more than 10 times India’s standard of living. Will China soon have a better standard of living than the U.S.? Read the following Clear It Up feature to find out.
Is China going to surpass the United States in terms of standard of living?
As Table 3.8 shows, China has the second largest GDP of the countries: $17.5 trillion compared to the United States’ $23 trillion. Perhaps it will surpass the United States, but probably not any time soon. China has a much larger population so that in per capita terms, its GDP is less than one fifth that of the United States ($12,358 compared to $69,231). The Chinese people are still quite poor relative to the United States and other developed countries. One caveat: For reasons we will discuss shortly, GDP per capita can give us only a rough idea of the differences in living standards across countries.
The world’s high-income nations—including the United States, Canada, the Western European countries, and Japan—typically have GDP per capita in the range of $20,000 to $50,000. Middle-income countries, which include much of Latin America, Eastern Europe, and some countries in East Asia, have GDP per capita in the range of $6,000 to $12,000. The world’s low-income countries, many of them located in Africa and Asia, often have GDP per capita of less than $2,000 per year.
Self-Check Question – answers found at end of chapter
- 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?
- 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 284.681CFA francs per dollar. Calculate the GDP per capita of Central African Republic.
