3 Ways to Compare GDP by Country
Why a Big Mac Costs Less in China Than in the United States
There are three ways to compare the economic output, or gross domestic product, 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 most commonly agreed-upon measure is 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. That means 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 percent 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. In 2017, it was $11.97 trillion. The good news for China's residents is that it also makes their 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 PPP. The Index says the yuan was undervalued by 40 percent.
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 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. In 2017, China's economic output using the PPP method was $23 trillion. That was $11 trillion more than the OER measurement.
The CIA World Factbook 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. For 2017, it shows that China is the world's largest economy. The European Union is second ($20 trillion) and the United States is third ($19 trillion). Next in order is India, producing $9 trillion, Japan ($5 trillion) and Germany ($4 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. You can use GDP per capita to compare any country with another one. Just make sure you are using PPP.
For example, China's rank falls to 104 when GDP per capita is used. That's because it has so many people. It has $15,400 of economic output for each of its 1.37 billion people. The U.S. standard of living is much higher, ranking at #18, with $57,300 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 $129,700 in economic output each.