Question

For which of the following countries - Japan, US, Brazil, Ethiopia - is the divergence between GNP per capita measured at official exchange rates and at purchasing power parity (PPP) likely to be largest? Which is likely to be smallest? Explain why for both answers.

Answer 1

Gross National Product in terms of PPP i.e. purchasing power parity means the amount/quantity of goods that can be purchased in interest rate adjusted unit of money. So basically it represents the comparative value of money in different nations.

Nation	GNP at PPP($)	GNP Per Capita (Exchange Rate in $)	Difference($)
Japan	44380	41310	3070
US	63690	63080	610
Brazil	15850	9140	6710
Ethopia	2010	790	1220

From the table, one can observe that the US has the least difference in both the GNP measures and Brazil having the most difference. The results are obvious as the US is a major exporter and free-market economy where production is generally for market purpose. Thus when everything produced is sold in the market and not used for self-consumption then every good produced is a part of total production and hence adds up in GNP calculation Secondly PPP is computed on the US $ as comparative currency so the difference must be least in the calculation of GNP.

The maximum difference is in the calculation for Brazil which is an emerging economy and most of the production is still for self-sustenance domestic purpose. Hence cheaper prices in the domestic economy lead to higher GNP in terms of PPP while lesser in terms of Nominal prices.