How the ppp methodology works

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Reference no: EM1347203

International comparisons of income per capita require converting each country's statistics to a common currency, typically U.S. dollars. The standard approach has been to convert using exchange rates. In recent years, international data have been compiled using purchasing power parity (PPP) as the basis for converting to a common currency unit. This exercise presents a simple example to elucidate how exchange-rate conversions can produce misleading results and how the PPP methodology works.

Exercises

a. In 1990, Zambia's GDP was K113 billion (where K stands for kwacha, the national currency). The population was 8.1 million people. To get GDP per capita in local currency units, divide GDP by the number of people. Make sure to take into account that GDP is in billions and population is in millions.

GDP per capita = K in 1990.

To convert this figure from kwacha units to U.S. dollar units using the exchange-rate method, divide by the exchange rate (kwacha per dollar). In 1991, the exchange rate averaged K29 per U.S.$, so in dollar units

GDP per capita = U.S.$ in 1990.

Reference no: EM1347203

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