GDP (Nominal) vs GDP (PPP)

GDP (Gross Domestic Product) is the total market value of all final goods and services produced in a country in a given period. Each country reports its data in its own currency. To compare the data, each country's statistics must be converted into a common currency. The two most common methods to convert GDP into a common currency are nominal and purchasing power parity (PPP).

Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. It is the original concept of GDP. In Nominal method, market exchange rates are used for conversion. It does not take into account differences in the cost of living in different countries. Fluctuations in the exchange rates of the country's currency may change a country's ranking from one year to the next, even though they often make little or no difference to the standard of living of its population.

PPP basis arguably more useful when comparing differences in living standards between nations. A haircut in New York is more expensive than in Lima; the price of a taxi ride of the same distance is higher in Paris than in Tunis; and a ticket to a cricket game costs more in London than in Lahore. PPP is an exchange rate at which the currency of one country is converted into that of the second country in order to purchase the same volume of goods and services in both countries. If a hamburger is selling in London for £2 and in New York for $4, this would imply a PPP exchange rate of 1 pound to 2 U.S. dollars. PPP exchange rates are relatively stable over time. Drawbacks of PPP is that PPP is harder to measure than nominal.

Out of 192 countries/economies, 179 have higher GDP in PPP basis and 12 have higher in nominal. For United States both are identical.

South Sudan has highest difference between PPP and nominal gdp calculation. GDP (PPP) of South Sudan is 5.82 times greater than GDP (nominal). South Sudan is followed by Sudan (5.70) and Myanmar (5.39) having ppp to nominal ratio above five. Five countries have this ratio between 4-5 and 34 economies has higher ppp values by above 3 times. This value is lowest for Switzerland (0.79).

There is a large gap between nominal and PPP based GDP in emerging market and developing countries. But for advanced countries, difference is much closer. Out of 12 economies which have ppp to nominal ratio is less than one (i.e, ppp value is less than nominal), 6 are among 11 richest and 8 are among 21 richest economies in nominal basis.

Nominal vs PPP