#GDP #PPP #NominalGDP #EconomicIndicators
🌍 Why is GDP (PPP) not more widely used and popular compared to nominal GDP?
When it comes to measuring the economic performance of a country, Gross Domestic Product (GDP) is often the go-to indicator. However, there are two main methods of calculating GDP: nominal GDP and GDP based on purchasing power parity (GDP (PPP)). While nominal GDP is widely known and used, GDP (PPP) is not as popular. So why is this the case? Let’s dive into the differences between the two measures and explore the reasons behind the lack of popularity of GDP (PPP) compared to nominal GDP.
## Understanding Nominal GDP and GDP (PPP)
Before we delve into the reasons behind the discrepancy in popularity between nominal GDP and GDP (PPP), it’s important to understand the differences between the two measures.
### Nominal GDP
Nominal GDP measures the economic output of a country using current market prices. It does not take into account differences in the cost of living between countries, making it a straightforward indicator of a country’s economic performance on the surface.
### GDP (PPP)
On the other hand, GDP (PPP) adjusts the GDP of different countries to reflect differences in the cost of living and inflation rates. This means that it provides a more accurate comparison of the real output and standard of living between different countries.
## Reasons for the Lack of Popularity of GDP (PPP)
### Lack of Awareness
One of the main reasons for the lack of popularity of GDP (PPP) is simply a lack of awareness and understanding of what it represents. Many people, including policymakers and the general public, are more familiar with nominal GDP and its straightforward calculation method, leading to a preference for this measure.
### Complexity of Calculation
Calculating GDP (PPP) requires adjusting nominal GDP using purchasing power parity exchange rates, which can be a more complex process compared to simply using market exchange rates for nominal GDP. This complexity can make it less appealing for some users who prefer simplicity and ease of understanding.
### Data Availability
Another factor that contributes to the lack of popularity of GDP (PPP) is the availability of data. Nominal GDP data is often readily available from sources such as the World Bank and International Monetary Fund, making it more convenient for users to access. In contrast, GDP (PPP) data may be more limited and require additional effort to obtain.
### Policy Implications
Despite the advantages of GDP (PPP) in providing a more accurate comparison of economic performance between countries, nominal GDP may still be preferred in some policy discussions and decision-making processes. This is because it is the more widely recognized measure and has been traditionally used in economic analyses and forecasting.
## Advantages of Using GDP (PPP)
While GDP (PPP) may not be as widely used and popular as nominal GDP, it offers several advantages that make it a valuable measure for analyzing and comparing the economic performance of countries.
### Accurate Comparison
GDP (PPP) provides a more accurate comparison of the real output and standard of living between countries by adjusting for differences in the cost of living. This makes it a more reliable measure for understanding the relative economic well-being of different countries.
### International Comparison
For international comparisons, GDP (PPP) is particularly useful as it allows for a more meaningful assessment of the economic performance and standards of living across nations. It can help to identify disparities and trends that may be obscured by nominal GDP measurements.
### Policy Relevance
In certain contexts, such as international development and poverty alleviation efforts, GDP (PPP) can offer valuable insights that nominal GDP may not fully capture. By accounting for differences in purchasing power, it can inform more targeted policy interventions and resource allocation.
## Overcoming the Challenges
While the lack of popularity of GDP (PPP) compared to nominal GDP presents challenges, there are steps that can be taken to increase its usage and recognition in economic analysis and policymaking.
### Education and Awareness
Raising awareness and promoting understanding of the advantages of GDP (PPP) is crucial for increasing its popularity. Educating policymakers, economists, and the general public about the importance of adjusting for differences in the cost of living can help foster greater appreciation for this measure.
### Improved Data Availability
Efforts to improve the availability and accessibility of GDP (PPP) data can also contribute to its wider adoption. This may involve collaboration between national statistical agencies, international organizations, and research institutions to enhance the collection and dissemination of this information.
### Policy Integration
Integrating GDP (PPP) into policy discussions and analyses can further elevate its relevance and popularity. Highlighting its strengths in providing a more nuanced understanding of economic performance and well-being can encourage its inclusion in decision-making processes.
In conclusion, while GDP (PPP) may not be as widely used and popular as nominal GDP, it offers distinct advantages in providing a more accurate comparison of economic performance between countries. Overcoming the challenges of awareness, complexity, data availability, and policy preferences can pave the way for greater recognition and adoption of GDP (PPP) as a valuable economic indicator. By leveraging its strengths and addressing obstacles, GDP (PPP) has the potential to become a more prominent and influential measure in economic analysis and policymaking.
Real GDP is more popular and more widely used compared to nominal GDP.
Look, for instance the late news in [Business Insider](https://www.businessinsider.com/recession-outlook-economy-gdp-fourth-quarter-of-2023-2024-1), [Reuters](https://www.reuters.com/markets/us/us-fourth-quarter-economic-growth-handily-beats-expectations-2024-01-25/) (the note says it is “adjusted” for inflation, so it is real GDP), or [The New York Times](https://www.nytimes.com/2024/01/25/business/economy/economy-q4-gdp.html).
All of them show Real GDP, not *nominal* GDP. That is to say, Nominal GDP is not a measure widely used.
Why not use PPP-adjusted GDP? The short answer is: if you want to compare ONE economy alone, use their Real GDP; if you want to compare MULTIPLE economies, you use Purchasing Power Parity.
PPP-adjustment is used to compare cross-sectional variation in quality of living. To do so, a price index based on a basket of goods needs to be constructed. Then, a ratio of the prices is generated. What is the problem with this? The basket of goods is not necessarily representative of one economy, but it is representative of “all economies”. Let me make the simplest example: Let’s suppose that Japanese people consume more Rice than Americans and you construct a representative “basket of goods” to compare Japanese and American prices. Well… the basket that you construct weighs Rice somewhere between the Japanese and American consumption. It is not really representative of America OR Japan per se, but it is representative of an average consumer that may be Japanese or American. This also implies that PPP adjustment is not just taking into account inflation in the US, but inflation passthrough exchange rate changes. It is adjusting for inflation in the US and Japan, and other economies. That is one reason why real growth rates differ from PPP-adjusted growth rates.
In other words, constructing this price index adds an additional layer of “distortions” to GDP in order to make many countries comparable. If you are writing the news or a report ONLY on the US economy, you most definitely want to avoid having additional layers.