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Principles of Macroeconomics for AP® Courses 2e

5.4 Comparing GDP among Countries

Principles of Macroeconomics for AP® Courses 2e5.4 Comparing GDP among Countries
  1. Preface
  2. 1 Welcome to Economics!
    1. Introduction
    2. 1.1 What Is Economics, and Why Is It Important?
    3. 1.2 Microeconomics and Macroeconomics
    4. 1.3 How Economists Use Theories and Models to Understand Economic Issues
    5. 1.4 How To Organize Economies: An Overview of Economic Systems
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
  3. 2 Choice in a World of Scarcity
    1. Introduction to Choice in a World of Scarcity
    2. 2.1 How Individuals Make Choices Based on Their Budget Constraint
    3. 2.2 The Production Possibilities Frontier and Social Choices
    4. 2.3 Confronting Objections to the Economic Approach
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  4. 3 Demand and Supply
    1. Introduction to Demand and Supply
    2. 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services
    3. 3.2 Shifts in Demand and Supply for Goods and Services
    4. 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process
    5. 3.4 Price Ceilings and Price Floors
    6. 3.5 Demand, Supply, and Efficiency
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  5. 4 Labor and Financial Markets
    1. Introduction to Labor and Financial Markets
    2. 4.1 Demand and Supply at Work in Labor Markets
    3. 4.2 Demand and Supply in Financial Markets
    4. 4.3 The Market System as an Efficient Mechanism for Information
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  6. 5 The Macroeconomic Perspective
    1. Introduction to the Macroeconomic Perspective
    2. 5.1 Measuring the Size of the Economy: Gross Domestic Product
    3. 5.2 Adjusting Nominal Values to Real Values
    4. 5.3 Tracking Real GDP over Time
    5. 5.4 Comparing GDP among Countries
    6. 5.5 How Well GDP Measures the Well-Being of Society
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  7. 6 Economic Growth
    1. Introduction to Economic Growth
    2. 6.1 The Relatively Recent Arrival of Economic Growth
    3. 6.2 Labor Productivity and Economic Growth
    4. 6.3 Components of Economic Growth
    5. 6.4 Economic Convergence
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  8. 7 Unemployment
    1. Introduction to Unemployment
    2. 7.1 How Economists Define and Compute Unemployment Rate
    3. 7.2 Patterns of Unemployment
    4. 7.3 What Causes Changes in Unemployment over the Short Run
    5. 7.4 What Causes Changes in Unemployment over the Long Run
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  9. 8 Inflation
    1. Introduction to Inflation
    2. 8.1 Tracking Inflation
    3. 8.2 How to Measure Changes in the Cost of Living
    4. 8.3 How the U.S. and Other Countries Experience Inflation
    5. 8.4 The Confusion Over Inflation
    6. 8.5 Indexing and Its Limitations
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  10. 9 The International Trade and Capital Flows
    1. Introduction to the International Trade and Capital Flows
    2. 9.1 Measuring Trade Balances
    3. 9.2 Trade Balances in Historical and International Context
    4. 9.3 Trade Balances and Flows of Financial Capital
    5. 9.4 The National Saving and Investment Identity
    6. 9.5 The Pros and Cons of Trade Deficits and Surpluses
    7. 9.6 The Difference between Level of Trade and the Trade Balance
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  11. 10 The Aggregate Demand/Aggregate Supply Model
    1. Introduction to the Aggregate Supply–Aggregate Demand Model
    2. 10.1 Macroeconomic Perspectives on Demand and Supply
    3. 10.2 Building a Model of Aggregate Demand and Aggregate Supply
    4. 10.3 Shifts in Aggregate Supply
    5. 10.4 Shifts in Aggregate Demand
    6. 10.5 How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
    7. 10.6 Keynes’ Law and Say’s Law in the AD/AS Model
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  12. 11 The Keynesian Perspective
    1. Introduction to the Keynesian Perspective
    2. 11.1 Aggregate Demand in Keynesian Analysis
    3. 11.2 The Building Blocks of Keynesian Analysis
    4. 11.3 The Expenditure-Output (or Keynesian Cross) Model
    5. 11.4 The Phillips Curve
    6. 11.5 The Keynesian Perspective on Market Forces
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
  13. 12 The Neoclassical Perspective
    1. Introduction to the Neoclassical Perspective
    2. 12.1 The Building Blocks of Neoclassical Analysis
    3. 12.2 The Policy Implications of the Neoclassical Perspective
    4. 12.3 Balancing Keynesian and Neoclassical Models
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  14. 13 Money and Banking
    1. Introduction to Money and Banking
    2. 13.1 Defining Money by Its Functions
    3. 13.2 Measuring Money: Currency, M1, and M2
    4. 13.3 The Role of Banks
    5. 13.4 How Banks Create Money
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  15. 14 Monetary Policy and Bank Regulation
    1. Introduction to Monetary Policy and Bank Regulation
    2. 14.1 The Federal Reserve Banking System and Central Banks
    3. 14.2 Bank Regulation
    4. 14.3 How a Central Bank Executes Monetary Policy
    5. 14.4 Monetary Policy and Economic Outcomes
    6. 14.5 Pitfalls for Monetary Policy
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  16. 15 Exchange Rates and International Capital Flows
    1. Introduction to Exchange Rates and International Capital Flows
    2. 15.1 How the Foreign Exchange Market Works
    3. 15.2 Demand and Supply Shifts in Foreign Exchange Markets
    4. 15.3 Macroeconomic Effects of Exchange Rates
    5. 15.4 Exchange Rate Policies
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  17. 16 Government Budgets and Fiscal Policy
    1. Introduction to Government Budgets and Fiscal Policy
    2. 16.1 Government Spending
    3. 16.2 Taxation
    4. 16.3 Federal Deficits and the National Debt
    5. 16.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation
    6. 16.5 Automatic Stabilizers
    7. 16.6 Practical Problems with Discretionary Fiscal Policy
    8. 16.7 The Question of a Balanced Budget
    9. Key Terms
    10. Key Concepts and Summary
    11. Self-Check Questions
    12. Review Questions
    13. Critical Thinking Questions
    14. Problems
  18. 17 The Impacts of Government Borrowing
    1. Introduction to the Impacts of Government Borrowing
    2. 17.1 How Government Borrowing Affects Investment and the Trade Balance
    3. 17.2 Fiscal Policy, Investment, and Economic Growth
    4. 17.3 How Government Borrowing Affects Private Saving
    5. 17.4 Fiscal Policy and the Trade Balance
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  19. 18 Macroeconomic Policy Around the World
    1. Introduction to Macroeconomic Policy around the World
    2. 18.1 The Diversity of Countries and Economies across the World
    3. 18.2 Improving Countries’ Standards of Living
    4. 18.3 Causes of Unemployment around the World
    5. 18.4 Causes of Inflation in Various Countries and Regions
    6. 18.5 Balance of Trade Concerns
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  20. A | The Use of Mathematics in Principles of Economics
  21. B | Indifference Curves
  22. C | Present Discounted Value
  23. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
    17. Chapter 17
    18. Chapter 18
  24. References
  25. Index

By the end of this section, you will be able to:

  • Explain how we can use GDP to compare the economic welfare of different nations
  • Calculate the conversion of GDP to a common currency by using exchange rates
  • Calculate GDP per capita using population data

It is common to use GDP as a measure of economic welfare or standard of living in a nation. When comparing the GDP of different nations for this purpose, two issues immediately arise. First, we measure a country's GDP in its own currency: the United States uses the U.S. dollar; Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen; Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting to a common currency. A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has almost three times as many people as Mexico and nine times as many people as Canada. Thus, if we are trying to compare standards of living across countries, we need to divide GDP by population.

Converting Currencies with Exchange Rates

To compare the GDP of countries with different currencies, it is necessary to convert to a “common denominator” using an exchange rate, which is the value of one currency in terms of another currency. We express exchange rates either as the units of country A’s currency that need to be traded for a single unit of country B’s currency (for example, Japanese yen per British pound), or as the inverse (for example, British pounds per Japanese yen). We can use two types of exchange rates for this purpose, market exchange rates and purchasing power parity (PPP) equivalent exchange rates. Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign exchange markets. PPP-equivalent exchange rates provide a longer run measure of the exchange rate. For this reason, economists typically use PPP-equivalent exchange rates for GDP cross country comparisons. We will discuss exchange rates in more detail in Exchange Rates and International Capital Flows. The following Work It Out feature explains how to convert GDP to a common currency.

Work It Out

Converting GDP to a Common Currency

Using the exchange rate to convert GDP from one currency to another is straightforward. Say that the task is to compare Brazil’s GDP in 2013 of 4.8 trillion reals with the U.S. GDP of $16.6 trillion for the same year.

Step 1. Determine the exchange rate for the specified year. In 2013, the exchange rate was 2.230 reals = $1. (These numbers are realistic, but rounded off to simplify the calculations.)

Step 2. Convert Brazil’s GDP into U.S. dollars:

Brazil's GDP in 
nbsp;U.S.
 = Brazil's GDP in realsExchange rate (reals/
nbsp;U.S.)
 = 4.8 trillion reals2.230 reals per 
nbsp;U.S.
 = $2.2 trillion
Brazil's GDP in 
nbsp;U.S.
 = Brazil's GDP in realsExchange rate (reals/
nbsp;U.S.)
 = 4.8 trillion reals2.230 reals per 
nbsp;U.S.
 = $2.2 trillion

Step 3. Compare this value to the GDP in the United States in the same year. The U.S. GDP was $16.6 trillion in 2013, which is nearly eight times that of GDP in Brazil in 2012.

Step 4. View Table 5.8 which shows the size of and variety of GDPs of different countries in 2013, all expressed in U.S. dollars. We calculate each using the process that we explained above.

Country GDP in Billions of Domestic Currency Domestic Currency/U.S. Dollars (PPP Equivalent) GDP (in billions of U.S. dollars)
Brazil 4,844.80 reals 2.157 2,246.00
Canada 1,881.20 dollars 1.030 1,826.80
China 58,667.30 yuan 6.196 9,469.10
Egypt 1,753.30 pounds 6.460 271.40
Germany 2,737.60 euros 0.753 3,636.00
India 113,550.70 rupees 60.502 1,876.80
Japan 478,075.30 yen 97.596 4,898.50
Mexico 16,104.40 pesos 12.772 1,260.90
South Korea 1,428,294.70 won 1,094.925 1,304.467
United Kingdom 1,612.80 pounds 0.639 2,523.20
United States 16,768.10 dollars 1.000 16,768.10
Table 5.8 Comparing GDPs Across Countries, 2013 (Source: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx)

GDP Per Capita

The U.S. economy has the largest GDP in the world, by a considerable amount. The United States is also a populous country; in fact, it is the third largest country by population in the world, although well behind China and India. Is the U.S. economy larger than other countries just because the United States has more people than most other countries, or because the U.S. economy is actually larger on a per-person basis? We can answer this question by calculating a country’s GDP per capita; that is, the GDP divided by the population.

GDP per capita = GDP/populationGDP per capita = GDP/population

The second column of Table 5.9 lists the GDP of the same selection of countries that appeared in the previous Tracking Real GDP over Time and Table 5.8, showing their GDP as converted into U.S. dollars (which is the same as the last column of the previous table). The third column gives the population for each country. The fourth column lists the GDP per capita. We obtain GDP per capita in two steps: First, by multiplying column two (GDP, in billions of dollars) by 1000 so it has the same units as column three (Population, in millions). Then divide the result (GDP in millions of dollars) by column three (Population, in millions).

Country GDP (in billions of U.S. dollars) Population (in millions) Per Capita GDP (in U.S. dollars)
Brazil 2,246.00 199.20 11,275.10
Canada 1,826.80 35.10 52,045.58
China 9,469.10 1,360.80 6,958.48
Egypt 271.40 83.70 3,242.90
Germany 3,636.00 80.80 44,999.50
India 1,876.80 1,243.30 1,509.50
Japan 4,898.50 127.3 38,479.97
Mexico 1,260.90 118.40 10,649.90
South Korea 1,304.47 50.20 25,985.46
United Kingdom 2,523.20 64.10 39,363.50
United States 16,768.10 316.30 53,013.28
Table 5.9 GDP Per Capita, 2013 (Source: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx)

Notice that the rankings by GDP in billions of U.S. dollars, and by GDP per capita, are different than the ranking of GDP by each country’s currency. Measured by its own currency, the rupee, India has a somewhat larger GDP than Germany. But measured by U.S. dollars, Germany’s GDP is twice India’s, and on a per capita basis in U.S. dollars, Germany has more than 280 times India’s standard of living.

Clear It Up

Is China going to surpass the United States in terms of standard of living?

As Table 5.9 shows, China has the second largest GDP of the countries: $9.5 trillion compared to the United States’ $16.8 trillion. Perhaps it will surpass the United States, but probably not any time soon. China has a much larger population so that in per capita terms, its GDP is less than one fifth that of the United States ($6,958.48 compared to $53,013). The Chinese people are still quite poor relative to the United States and other developed countries. One caveat: For reasons we will discuss shortly, GDP per capita can give us only a rough idea of the differences in living standards across countries.

The world's high-income nations—including the United States, Canada, the Western European countries, and Japan—typically have GDP per capita in the range of $20,000 to $50,000. Middle-income countries, which include much of Latin America, Eastern Europe, and some countries in East Asia, have GDP per capita in the range of $6,000 to $12,000. The world's low-income countries, many of them located in Africa and Asia, often have GDP per capita of less than $2,000 per year.

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