GDP by Country as Measured by Three Methods
Why a Big Mac Costs Less in China Than in the United States
Gross domestic product by country allows you to compare the economies of the world's nations. It measures everything produced by everyone in the country whether they are citizens or foreigners.
The International Monetary Fund has measured the GDP of all countries in the world. As of 2018, the top 10 countries by GDP are:
Combined, these countries produce 67% of the world's total GDP of $84.7 trillion.
The European Union is a trade and monetary union, not a country. But if it were, it would be the second largest. Its GDP is $18.7 trillion.
If the top three economies -- United States, EU, and China -- were combined, their GDP would be $52.6 trillion. That's 62% of the world's total output. Their GDP reveals that what they do has an outsized impact on the global economy.
Three Ways to Measure GDP by Country
There are three ways to compare GDP between countries. The one you use depends on your purpose and how exchange rates and population would affect it.
Here's a summary of the three ways, how they are calculated, and when you would use them.
Official Exchange Rate
The IMF uses the most commonly agreed-upon measure, the official exchange rate. The country's government or central bank sets this rate. It tells you how much the bank will give you in exchange for one unit of your country's currency.
An official exchange rate must be a fixed exchange rate. The values doesn't change according to the market's whim. Most central banks fix their currency's rate to either the U.S. dollar or the currencies of its primary trading partners.
For example, China has traditionally maintained a fixed rate for the yuan, its national currency. China pegged the yuan to a 2% range against a basket of currencies that include the U.S. dollar. This lets China control its labor and manufacturing costs. That makes the prices of China's exports less expensive, so anything "Made in China" is more competitive in the global marketplace.
Because China has a low exchange rate, the OER method results in a low figure for China's economic output.
The good news for China's residents is that it also makes the cost of living lower. In January 2018, a Big Mac only cost $3.17 in China, while it cost $5.28 in the United States. The magazine "The Economist" created the Big Mac Index to determine where currencies are at their correct level according to purchasing power parity. The Index says the yuan was undervalued by 40%.
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.
In addition to the IMF, the CIA World Factbook provides the OER method. It lists every country and its GDP by alphabetical order. That's helpful when you already know which country you want to investigate.
Purchasing Power Parity
Purchasing power parity allows you to make more accurate comparisons of the economies of two countries. It compensates for exchange rates changes over time. It also accounts for government manipulation of exchange rates.
GDP using PPP is calculated by determining what each item purchased in a country would cost if it were sold in the United States. Those costs are then added up for the total goods and services produced in that country in the given year.
PPP can be very subjective. Everything produced in a country must be assigned a U.S. dollar value. That can be especially difficult if it's something that's not produced or even sold in the United States, such as a cart pulled by oxen.
The PPP method is most important when comparing emerging market countries to developed market countries. The PPP method gives a more accurate reflection of the power of China's economy.
The IMF lays out GDP by Country using PPP. Since this method takes into account the effect of exchange rates, it ranks all the countries in order of GDP.
In 2018, China's economic output using the PPP method was $25.3 trillion. That was $11.9 trillion more than the OER measurement. If the PPP method is used, China replaces the United States as the world's largest economy.
World's 10 Largest Economies Using PPP
(in trillions of U.S. Dollars)
GDP per Capita
GDP per capita is a good way to compare the economic output of a country as experienced by its residents. It divides a country's economic output by its population. You can use GDP per capita to compare any country with another one.
The IMF provides GDP per capita based on the OER method. Here are the top 10 countries as of 2018:
- Luxembourg: $114,230
- Switzerland: $82,950
- Macao: $82,390
- Norway: $81,690
- Ireland: $76,100
- Iceland: $74,280
- Qatar: $70,780
- Singapore: $64,040
- United States: $62,610
- Denmark: $60,690
China and the EU don't even make this list. China's GDP per capita is $10,150 and the EU's is $36,540. They both have large regions of people with low GDP. China's population is 1.37 billion people.
The situation looks different when using PPP. For example, China's GDP per capita rises to $15,400 when the effect of the exchange rate is accounted for. The U.S. standard of living is much higher than China's, at $57,300 GDP per capita. That's because it has much fewer people.