PPP_GDP_Example - India P(C$/BM) Quantity Big Macs (BM)...

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Converting Indian GDP into Canadian $ using the nominal exchange rate Nominal Exchange Rates e(INR/C$) 45.0 E(C$/INR) 0.02 Canada India P(C$/BM) Quantity Big Macs (BM) GDP(C$) P*(INR/BM) Quantity Big Macs (BM) GDP(INR) GDP(C$) 15.00 100 1500 500 100 50000 1111 GDP is identical in the two countries yet converting using nominal exchange rates understates Indian GDP. Converting Indian GDP into Canadian $ using the PPP exchange rate PPP Exchange Rates q(INR/C$) = P*/P 33.3 Since P*/P < e, Canadian goods are too expensive relative to PPP. Q(C$/INR)=P/P* 0.03 Since P/P* > E, Canadian goods are too expensive relative to PPP. Canada
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Unformatted text preview: India P(C$/BM) Quantity Big Macs (BM) GDP(C$) P*(INR/BM) Quantity Big Macs (BM) GDP(INR) GDP(C$) 15.00 100 1500 500 100 50000 1500 For a comprehensive cross country comparison data set see: http://pwt.econ.upenn.edu/ General problem: non-traded goods are typically less expensive in developing countries so nominal exchange rates understate the level of GDP. Only one good produced in both countries: Big Macs. Comparing GDP Across Countries Using PPP Exchange Rates GDP measured using PPP exchange rate is the same in both countries, C$1500, as it should be....
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