In the last posting I gave an example of how buying a bottle of Coke in the United States costs about 3 times more than it does in China just using the current exchange rate between the USD and the Chinese RMB. However, purchasing power goes much deeper than a simple exchange rate equation. This post will look at Purchase Power Parity (PPP), a possibly better way to get a true picture of cost differences because it looks at living standards when compared to straight GDP.

The exchange rate between the USD and Chinese RMB is about 6.50 and 44.91 for the Indian Rupee, meaning $1USD buys 6.50RMB or 44.91Rupees. World lists of GDP are calculated in the USD to normalize the results. China and India’s currency values are much lower than the USD, so China and India have a total GDP much lower than the world leading United States.



PPP is another way of analyzing the total value of a country’s economic output. Some economists believe PPP is better because living standards and other economic factors are taken into the equation before being normalized to the USD for ease of comparison. Downsides do exist in that the factors used may be different in each country and some parts of the formula may be estimated.



There are many interesting facts found when comparing these two charts. Canada is number 9 in GDP, but falls out of the top 10 to number 15 when looking at PPP. Canada’s PPP is calculated a little lower than its GDP value at $1,335,000. Replacing Canada in the PPP top 10 at number 6 is Russia, which was number 11 in GDP with a nearly 50% lower value of $1,465,079. Next, the total economic GDP output of the European Union countries is close to 15% more than the United States. Yet, the PPP number for the European Union is only a scant 1.5% higher than the United States. Also, the European Union, United States, Japan, Germany, UK, France, and Italy all have a lower PPP values while the BRIC countries (Brazil, Russia, India, and China) all have higher PPP values when compared to GDP values. Lastly, the United States has a GDP nearly 150% higher than number 2 China. The United States is still leading number 2 China in PPP, but its lead is cut to just over 50%.

A look at the BRIC countries shows that Brazil’s increase is very small (nearly +5%). However, the Asian part of BRIC in Russia (nearly+ 50%), India (nearly +240%), and China (nearly +60%) are markedly higher. You can invest more in Russia, India, and China with less money. At the same time your investments will not go as far in the higher cost countries of the United States, Japan, Germany, UK, France, and Italy.

Over the past few weeks I have found that World GDP growth favors emerging Asian economies, new billionaires are also in Asia’s emerging economies, and that PPP values show that investments will go markedly further in these Asian emerging economies.

by M.F.

Sources
Data/Information Links:
PPP Definition
World GDP Rankings (via IMF query)
World PPP Rankings