Difference between nominal GDP and PPP GDP

Both nominal GDP and GDP in terms of purchasing power parity  (GDP PPP) are two types of economic measurement that study the size of the world’s economies. The term GDP in each case refers to the p inner roduct Gross .

According to the definition of the two meters, GDP by parity and nominal GDP  are different in any country in the world with one exception: United States, where they coincide as the country whose currency is taken as an international reference.

The main difference existing between these two forms of measurement and cost estimation is that the GDP nominal is based on a calculation of the output of a country by reference to a common currency (usually does in US dollars).

On the other hand, the GDP of purchasing power parity focuses on the purchasing power that is had in the territories with certain amounts of own currency that subsequently undergoes homogenization when passed to dollars . By definition, this is a GDP that has undergone a conversion following purchasing power parity rates. In other words, it could be said that GDP derived from purchasing power establishes a certain relationship between production and the relative prices of that nation.

It is often said that the GDP PPA gives a more real and faithful image of what a country’s situation is , since it shows the purchasing power available to its citizens and is not simply based on the nominal income of people As does the nominal. However, there is frequent mistrust of the accounts prepared by each country, since sometimes they do not faithfully show their reality or do not have mechanisms for economic transparency.

It is often considered that nominal GDP is affected by price volatility and exchange rates, especially in countries with inflation . However, nominal GDP requires less time and resources to calculate . For this reason, the latter has consolidated over the years as the most used tool when it comes to knowing the richness of different parts of the world.

It is often possible that depending on one GDP or another, different situations may occur as results , in which one country is above the other in terms of one and below in terms of another. This situation stands out especially in underdeveloped countries where a great purchasing power is acquired with a dollar .

Let us take as a close example the difference between Germany and Spain: Although the estimated nominal GDP in Germany is greater than that of the Spanish case, in terms of purchasing power parity the situation is completely inverse, since with the same amount of money in both countries, A citizen has greater purchasing power in Spain.

Leave a Comment