What is the difference between GDP and GDP accounting for PPP (purchasing power parity)?

what does gdp ppp mean

The standard measure of gross domestic product, or GDP, is absolute. In contrast, some accounts of GDP are adjusted for relative purchasing power parity. or PPP. This adjustment is based on an attempt to convert nominal GDP into a number more easily comparable between countries with different currencies.

Gross Domestic Product

In contemporary macroeconomics, GDP refers to the total monetary value of the goods and services produced within one country. Nominal GDP calculates the monetary value in current, absolute terms. Real GDP takes the nominal GDP and adjusts it for inflation.

Purchasing Power

Purchasing power is a term used in economics to describe the relationship between income and costs. An individual in New York might make $100,000 a year, while an individual in Wyoming might make $50,000 a year. In absolute terms, the worker in New York is better off. If it costs three times as much to live in New York than Wyoming, however, the worker in Wyoming has a higher real income

.

GDP with PPP

One way to think of what GDP with PPP represents is to imagine the total collective purchasing power of Japan if it were used to make the same purchases in U.S. markets. This only works after all yen are exchanged for dollars, otherwise the comparison does not make sense. The net effect is to describe how many dollars it takes to buy $1 worth of goods in Japan as opposed to the U.S.

Take for example the following micro-example to illustrate that point. Suppose it costs $10 to buy a shirt in the U.S. It costs €8.00 to buy the same shirt in Germany. To make an apples-to-apples comparison, the €8.00 in Germany needs to be converted into U.S. dollars. If the exchange rate was such that the shirt in Germany costs $15.00, the PPP would be 15/10, or 1.5. For every $1.00 spent on the shirt in the U.S. it takes $1.50 to obtain the same shirt in Germany.

Source: www.investopedia.com

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