Key Points

  • Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
  • One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
  • GDP per capita is GDP divided by population.

Introduction

It is common to use GDP as a measure of economic welfare or standard of living in a nation. When comparing the GDP of different nations for this purpose, two issues immediately arise.
First, the GDP of a country is measured in its own currency—the United States uses the US dollar; most countries of Western Europe use the euro; Japan uses the yen; and Mexico uses the peso. Because of this, comparing GDP between two countries requires converting to a common currency.
A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has roughly three times as many people as Mexico and nine times as many people as Canada. So, if we are trying to compare standards of living across countries, we need to divide GDP by population.

Converting currencies with exchange rates

To compare the GDP of countries with different currencies, it is necessary to convert to a common denominator using an exchange rate, which is the value of one currency in terms of another currency.
Exchange rates are expressed either as the units of country A’s currency that need to be traded for a single unit of country B’s currency—for example, Japanese yen per British pound—or as the inverse—British pounds per Japanese yen. Two types of exchange rates can be used to compare GDPs: market exchange rates and purchasing power parity, or PPP, equivalent exchange rates.
Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign exchange markets. PPP-equivalent exchange rates provide a longer-run measure of the exchange rate. For this reason, PPP-equivalent exchange rates are typically used for cross-country comparisons of GDP.
 

GDP per capita

The US economy has the largest GDP in the world, by a considerable amount. The United States is also a populous country. In fact, it is the third largest country by population in the world—although it's well behind China and India. So is the US economy larger than other countries' economies just because the United States has more people or because the US economy is actually larger on a per-person basis? This question can be answered by calculating countries' GDP per capita—the GDP divided by the population.
To calculate GDP per capita, we start with the formula below.
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We can use the table below to fill in the formula. The second column lists the GDP of various countries converted into US dollars. The third column gives the population for each country. The fourth column lists the GDP per capita—no cheating, don't look at this column yet!
GDP per capita is obtained in two steps:
  1. Make sure your GDP and population numbers are in the same units. In our example, GDP is currently in billions, but population is in millions. We'll need to divide GDP by 1000 so it has the same units as population.
  2. Divide GDP by population.
Once you've done the calculations for each of the countries yourself, you can check your work against the fourth column of the table.
GDP per capita, 2013
Country GDP in billions of US dollars Population in millions Per capita GDP in US dollars
Brazil 2,246.00 199.20 11,172.50
Canada 1,826.80 35.10 52,037.10
China 9,469.10 1,360.80 6,958.70
Egypt 271.40 83.70 3,242.90
Germany 3,636.00 80.80 44,999.50
India 1,876.80 1,243.30 1,509.50
Japan 4,898.50 127.3 38,467.80
Mexico 1,260.90 118.40 10,649.90
South Korea 1,304.47 50.20 25,975.10
United Kingdom 2,523.20 64.10 39,371.70
United States 16,768.10 316.30 53,001.00
 
Notice that ranking by GDP is different from ranking by GDP per capita. For example, India has a somewhat larger GDP than South Korea, but on a per capita basis, South Korea has more than 10 times India’s standard of living.

Summary

  • Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency.
  • One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another.
  • GDP per capita is GDP divided by population.