Question

When comparing the GDP of different countries, two issues immediately arise. What are these issues and how does one account for these while comparing the GDP for different countries? Provide examples and explain your answer.

Answer 1

GDP is commonly used as a measure of economic welfare or standard of living of the citizens in a nation. When comparing GDP of different countries (comparing economic welfare or standard of living) ,two issues immediately arise:

• GDP of a country is measured in its own currency which creates complexity when comparing GDP between two different countries. For example, The United States uses the US dollar; China uses the Yuan; India uses the Indian rupee.

However, one may account to this issue by converting to a common currency or a common denominator using an exchange rate, which is the value of one currency in terms of another currency.

• A second major issue is that countries have different populations. For example, The United States has a much larger economy than Canada, but it also comprises of roughly nine times as many people as Canada.

However, while comparing economic welfare or standard of living across countries, it is necessary to calculate GDP per capita- the GDP divided by the population.