Download Case 1

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