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[Economy Q] Why use GDP (nominal) instead of GDP (PPP) when

comparing two nations?

After the previous question regarding GDP (at purchasing power parity) between Japan
and China, Tarun asked,

i have a query why GDP (ppp) is not used often to measure worth of countries as it
give real picture than using GDP (Nominal terms)

Answer
For example:

In India majority of people are poor, and receive subsidized grains (like 1 kilo rice for
3 Rs, kerosene etc. from PDS shops.

In America poor people are supported by Government by food stamps and social
security cheques.

Now comparing two nations, GDP (PPP) wise,

Obviously majority of Indians are poor, and majority of them get cheap- subsidized
stuff, the purchasing power parity of India may look better than Americans.

But does it really mean India is financially more powerful than America just because
Indians can buy more stuff in local market compared to Americans?

No, because financial activity is not limited to local market.

Weve to import crude oil from Middle east and buy jet-planes, missiles from
Russia,France and Israel.

Weve buy pulses and onions from Africa and Pakistan(!), Those people are not going
to sell us stuff with subsidy in Rupees, like we get in our local market.

Theyll ask hard dollars (or gold or diamonds) as payment. So there, in international
market, America can purchase more crude oil, fighter-jets, missiles and onions
compared to India, even though its GDP-PPP wise it may not be powerful as India.

Even China can buy more stuff internationally than we can, because our forex reserve
is only 270 billion, while Chinese got 1400 billion $!
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GDP at PPP gives us only picture of how much stuff we can buy within our country.

GDP at nominal rate ($) gives us bigger-picture of how much stuff we can buy
internationally.

Using GDP (nominal), it becomes easier to compare two nations financial strength,
by comparing their ability to purchase in international market in same currency
(dollars). The one who has more $$, can purchase more stuff internationally.

So bigger the GDP (Nominal), powerful a country is financially. While in case of

GDP(PPP) we cannot say with confidence that bigger the GDP (PPP) is, powerful a
country is financially, because they may be heavily-subsidizing it.

URL to article: http://mrunal.org/2012/05/why-gdp-ppp.html

Posted By On 30/05/2012 @ 00:36 In the category Economy

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