Sunday, September 14, 2008

India is the 4th largest country in terms of the GDP (PPP)

You must be thinking that I'm joking or I'm talking about 2025. No Im not. These are figures of the year 2007 given by IMF and World Bank. I will come to that in a while. Lets forget that for a moment.

I was just browsing to get some comparative index of the living standard of people across different countries in the world and their purchasing power. How do you do that?

For a long time, GDP (Gross domestic product) and GDP per capita used to be the benchmark for that.

In simple terms, wiki says:
GDP = consumption + gross investment + government spending + (exports − imports).

Next came the Human Development Index.

Wiki says:
This index is a normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide.

But if I understood these correctly, it does not take into account the purchasing power of an individual.. Lets take two countries - India and Germany. Their respective currencies are Euro and Rupee. The exchange ratio between these two currencies is 1Euro = 65Rs approximately. So lets compare a service in both countries.. I take the haircut. In Germany, it costs 10Euro minimum in general. In India, It may cost 100Rs max in big cities for an above average one. (Although you can avail that service at much cheaper rate, I kept the Indian one slightly on the higher side to have a correction factor for quality of service.) Now, simple maths says that the cost of the haircut is 6.5 times cheaper in India. So if we take the haircut as a benchmark, the German need to earn 6.5 times the Indian to have the same living standard. Obviously, the values are way of target, but my point is that, just because an Indian may earn less doesn't necessarily mean that he may have a lower living standard. Thankfully, people who know these things have made another index to make necessary correction to account for the difference in living cost.

That is PPP (Purchasing power parity)

Wiki says:
The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power.

India ranks 12th by GDP but 4th by PPP.

Fig Courtesy Wikipedia.

See the following link to get the ranks based on PPP.

Thus you can see that India is the 4th largest economy in the world today, bigger than Germany and UK.
(based on GDP-PPP).

As you would read in those pages, this, by no means, cannot be considered as the absolute index for comparison. But this will give you a perspective of the purchasing ability of the people, which is missing in other indexes.


Even PPP is a Gross Income. It means that the bigger the population, the bigger the GDP (in general, of course with exceptions). India, due to its size would have come that high in the list.

I think, more than PPP, the PPP/person (PPP per capita) would be a more interesting figure. But here also, the figures would be distorted if the wealth is concentrated among few.

So I think, an even more interesting figure would be the average PPP of the middle 70% of the population. What I meant is this. Remove the top 15% and bottom 15%. Calculate the PPP of the remaining 70%. Divide that value with the no of people that fall into those 70%. Thus you would get the average purchasing ability of the common man in that country.

This is the "Joe's 70% average PPP".


Gross domestic product

Human Development Index

Purchasing power parity

List of countries by GDP (nominal)

List of countries by GDP per capita

List of countries by Human Development Index

List of countries by GDP-PPP

List of countries by PPP per capita

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