PPP_GDP_Example

# PPP_GDP_Example - India P(C\$/BM Quantity Big Macs(BM GDP(C\$...

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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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## This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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