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Case J5 Which Country is Better Off? Comparing national income statistics Taking account of exchange rates: the use of PPP measures There is a big problem with comparing GDP figures of different countries. They are measured in the local currency and thus have to be converted into a common currency (e.g. dollars or euros) at the current exchange rate. But the exchange rate may be a poor indicator of the purchasing power of the currency at home. For example, £1 may exchange for, say, 200 yen. But will £1 in the UK buy the same amount of goods as ¥200 in Japan? The answer is almost certainly no. To compensate for this, GDP can be converted into a common currency at a ‘purchasingpower parity rate’. This is a rate of exchange that would allow a given amount of money in one country to buy the same amount of goods in another country after exchanging it into the currency of the other country. The European Commission publishes PPP rates against the euro for all EU currencies and for the US dollar and Japanese yen. The OECD also publishes PPP rates against the US dollar for all OECD currencies. Using such rates to measure GDP gives the ‘purchasing-power standard’ (PPS) GDP. Looking at PPS GDP figures for different countries Using PPS GDP figures can give a quite different picture of the relative incomes in different countries than using simple GDP figures. GDP per head as a percentage of the EU average: 2003 GDP per head Portugal Greece Spain Sweden Finland France Germany Italy UK Japan Belgium Netherlands Austria Denmark Ireland USA Luxembourg 52.4 57.5 74.9 122.3 113.4 103.8 106.8 92.3 108.4 124.2 105.8 115.0 114.1 144.8 139.1 136.2 211.4 GDP (PPS) per head 67.3 68.9 85.8 101.3 101.6 101.9 102.2 102.2 104.5 105.4 107.7 110.2 112.6 113.7 119.8 140.3 187.3 Source: European Economy, Statistical Annex The table shows the GDP per head and PPS GDP per head in various countries. The figures are expressed as a percentage of the EU average. Thus in 2003 Denmark had a GDP per head 44.8 per cent higher than the EU average. But, because of higher Danish prices, the average person in Denmark could buy only 13.7 per cent more goods and services. GDP per head in Portugal was only 52.4 per cent of the EU average, but because of lower Portuguese prices, the average person in Portugal could buy 67.3 per cent as much as the average EU citizen. Question Referring to the figures in the table, which countries’ actual exchange rates would seem to understate the purchasing power of their currency? 2