So here's how I'm thinking of it. Imagine there are three different people in three different countries: Switzerland, Italy, and Vietnam. Each goes to the market and buys 1 dozen eggs. The Swiss person spends $7.50, the Italian spends about $4, and the person in Vietnam spends about $2. They all have the same product after leaving the market
My understanding is that GDP doesn't actually care what the product being exchanged actually is. As a result, if you're using GDP as a measure of "productive output", isn't this a bit deceptive? Putting these numbers against each other without any context as to what they are, it appears that the Swiss farmer somehow generated almost 4x the value of the Vietnamese farmer. However, if you gave someone 1 dozen Vietnamese eggs vs 1 dozen Swiss eggs, I doubt many people would be able to tell the difference
I did a tiny bit of research and it seems like there are multiple ways to measure GDP that are relatively more “fair” such as purchasing power. If that’s so, why do we still use GDP as a measure? It seems misleading
I was also looking at medical care in the USA vs other countries. I could pay out of pocket for a surgery I need in Germany at a top facility for ~10k. The same surgery in America (when billed to insurance, same quality institution) is ~80k. Isn't America kind of, in a way, incentivized to keep this price as high as people would possibly pay for it, to pump up GDP figures?
I'm wondering this because it often seems strange to me that the United States seems to have a higher GDP than China, despite China (from the outside) appearing to create far more productive output. Is it partially because America is very very expensive and China is relatively cheaper to live in?
Wouldn't countries with higher costs of living also have a skewed GDP as a result?
byu/Dreadsin inAskEconomics
Posted by Dreadsin
4 Comments
You’re correct GDP is based on the actual price of goods sold and non-traded items such as haircuts can vary significantly between countries.
To compare between countries taking into account these price differences something called Purchasing Power Parity is used.
On this basis the Chinese economy is bigger than the US
https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD
Though still considerably smaller on a per capita basis.
https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD
That is correct, and, as you noted, PPP adjusted GDP accounts for this issue. To your point on why nominal GDP is still useful, it’s because the PPP adjustment process is complex and, to an extent, subjective. It’s useful to have both the raw and adjusted figures available for comparison so you can see the impact of the adjustment. This post has more details on the benefits https://www.reddit.com/r/AskEconomics/s/pMcdc9xzer
That’s why there’s also a common metric known as [GDP at PPP](https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)) (Purchasing power parity).
There is never “one true metric” each metric tells a different story and is useful for different things.
GDP (PPP) is often considered more useful when looking at standard of living, regular (market rate) GDP is more useful when working with international trade flows.
You can adjust for that with PPP (Purchasing Power Parity) https://en.m.wikipedia.org/wiki/Purchasing_power_parity