Ways to Compare GDP by Country

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Multicoloured powder paints for sale in Kathmandu. To compare GDP by country, you've got to take into account their relative sizes. Photo: Jamie Marshall - Tribaleye/Getty Images

There are three ways to compare the economic output, or Gross Domestic Product (GDP), between countries. You decide which one to use depending on your purpose. That means you must take into account the effect of exchange rates and population. Here's a summary of the three ways, how they are calculated, and why you would use them.

Official Exchange Rate

The most commonly agreed-upon measure is the Official Exchange Rate (OER).

This gives the economic output within the country's own currency. It can be used to give you an idea of how much the country can use its economic power to purchase on the international markets. For example, China has traditionally maintained a modified fixed exchange rate for the yuan, its national currency. China pegged the yuan to a 2% range against a basket of currencies that include the dollar. As a result, China can control its labor and manufacturing costs. That makes the prices of China's exports less expensive, making anything "Made in China" more competitive in the global marketplace. For updates, see Dollar to Yuan Conversion.

As a result, the OER method results in a lower figure for China's economic output. In 2015, it was $11.38 trillion. The good news for China's residents is that it also makes their cost of living lower. For example, a Big Mac only cost $2.77 in China, while it cost $4.79 in the United States.

(Source: The Economist, Big Mac Index)

Use the OER method when you want to compare two emerging market countries to each other, or two developed economies to each other. You can also use it to compare the country's economic output over time, as long as its exchange rate hasn't changed dramatically.

The CIA provides the OER method.

It lists every country and its GDP by alphabetical order. That's helpful when you already know what country you want to investigate, and want to be able to find it easily.

Purchasing Power Parity

There are two disadvantages to using the OER method. The first, is that exchange rates change over time. The second is that they can be manipulated. Therefore, the OER method can lead you to draw misleading conclusions. Purchasing power parity (PPP) allows you to make more accurate comparisons of the economies of two countries. It's calculated by determining what each item purchased in a country would cost if it were sold in the United States. These are then added up for all the final goods and services produced in that country for that given year.

GDP using PPP takes some judgement to measure accurately. Everything produced in a country must be assigned a dollar value. That can be especially difficult if it's something that's not produced or even sold in the U.S., such as a cart pulled by oxen.

However, the PPP method is most important when comparing emerging market countries to developed market countries. The PPP method give a more accurate reflection of the power of China's economy. In 2015, China's economic output using the PPP method was $19.51 trillion. That was $8 trillion more than when the OER method was used.

Here's the CIA World Factbook's GDP by Country using PPP. Since this method takes into account the effect of exchange rates, it is able to rank all the countries in order of GDP. For 2015, it shows that China is the world's largest economy, while the European Union is second ($19.18 trillion), and the United States is third ($17.9 trillion). Next in order is India, producing $8 trillion, Japan ($4.6 trillion), and Germany ($3.8 trillion).

GDP per Capita

GDP per capita is a good way to compare the economic output of a country as experienced by its residents. That's because it divides a country's economic output by its population. For example, China's GDP per capita rank falls to 112. It has $14,300 of economic output for each of its 1.37 billion people. The U.S. standard of living is much higher, ranking at #19, with $56,300 GDP per capita. That's because it has much fewer people. The most prosperous in the world is the oil-rich country of Qatar, whose residents enjoy $145,000 in economic output each. Here's the CIA World Factbook's GDP per capita ranks for all countries. 

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