## The Difference Between GDP Nominal And GDP PPP

Here is a rule of thumb to help in grasping the practical differences between GDP Nominal and GDP PPP.

GDP is gross domestic product, the total economic output of a country, i.e., the amount of money a country makes. GDP per capita is the total output divided by the number of people in the population, so you can get a figure of the average output of each person, i.e., the average amount of money each person makes.

The two most common ways to measure GDP per capita are nominal and purchasing power parity (abbreviated PPP). Nominal is an attempt at an absolute measure, a sort of immovable standard that remains the same from country to country. It is the original concept of GDP. In contrast, PPP is an attempt at a relative measure, taking factors of each country into consideration in order to put a number on a person’s standard of living within that country.

Now, that explanation is a good start I suppose, but it is rather vague. That’s where most explanations stop, so let me put it in more concrete terms that will allow you to easily remember the difference.

A rule of thumb for understanding GDP’s PPP and nominal is that PPP is how much of a local good (like real estate, labor, or locally grown produce) a person can buy in their country, and nominal is roughly how much of an internationally traded good (diamonds, DVD players, Snickers bars) a person can buy in their country.

Thus, developing countries tend to have a higher (better) PPP than nominal, while developed countries have higher nominal than PPP. You can get dinner for \$10 or a DVD player for \$100 in the US, or you can get dinner for \$2 or a DVD player for \$100 in China. If you compare a Chinese person making \$20 a day to an American making \$150 a day, the Chinese person is slightly poorer in dinners than the American (1/10 of income versus 1/15), but is a lot poorer in DVD players than the American (5x income versus 2/3 of income). See how that works?

Nominal and PPP are identical in the US, because USD is used as the benchmark. But in all of the most developed countries except the US, the nominal is higher.

Another way to think about this is that, as a country’s citizens get richer and richer, they are more easily able to acquire international goods, but any good that must be provided by others of its own rich citizens, like college education, health care, taxis, etc. is going to get more expensive.

I’m just theorizing on the fly here, but my guess is that the fact that the UK, Japan etc. have higher nominal than PPP as compared to the US indicates that though the US is very rich in absolute dollars and so is able to buy lots of DVD players, it also has a greater income disparity than these countries, so the well off are able to buy more services from U.S. poor.

…which might explain some of the reason why a Big Mac or a hair cut might be cheaper in the US than in the UK, but health care and education more expensive, because the latter two are bought from the rich, whereas in the UK and Japan, the income disparity is narrower, so that even things bought from the poor are more expensive…

It is actually just a coincidence that the developed country that provides the benchmark currency has the lowest level of socialism and thus greatest income disparity among all developed countries, so don’t read too much into the fact that every developed country except the US has a higher nominal than PPP. Since whether PPP is higher or lower depends on the benchmark being used, it is a coincidence that things break down so neatly.

(There are other factors of course. Another important factor for keeping US PPP high compared to other countries is the availability of land compared to most other developed countries, thus keeping the price of both real estate and natural resources lower in the US than in those countries. Note that Canada also has almost the same PPP and nominal.)

Here’s some of the stats (in USD), taken from Wikipedia in the fall of 2009:

US PPP and Nom. 46,800
UK PPP 36,500 Nom. 43,700
Japan PPP 34,000 Nom. 38,000
Sweden PPP 37,200 Nom. 52,800
Canada PPP 38,025 Nom. 39,668
Australia PPP 38,910 Nom. 45,586
N. Zealand PPP 26,707 Nom. 27,259
S. Korea PPP 27,600 Nom. 19,500
Saudi Ar. PPP 23,814 Nom. 18,855
Russia PPP 15,948 Nom. 11,807
Mexico PPP 14,534 Nom. 10,212
Brazil PPP 10,455 Nom. 7737
Dominican R. PPP 8896 Nom. 5176
China PPP 6549 Nom. 3554
Bolivia PPP 4300 Nom. 1700
Vietnam PPP 2793 Nom. 1042
Kenya PPP 1711 Nom. 838
Haiti PPP 1317 Nom. 790
DR Congo PPP 329 Nom. 185

I think this bears my explanation out. A Bolivian can buy almost nothing of international goods and services, but because his countrymen are also poor, he can buy whatever they are able to provide much easier. A Swede is very rich in international money, richer than an American, but their relatively high level of socialism and income equality means they are poorer than an American as far as what they can get in their own country.

(And to put my own little political jab on it, this also seems to show that robust social safety nets a la Sweden do not kill capitalism and the ability to win in the race for the filthy lucre. Sweden is more productive per capita than the US is. Although that’s also because, for reasons I’m not prepared to explain, small rich countries like Sweden are more likely to have higher nominal GDPs compared to huge and lumbering rich countries like the U.S. and the UK.)

-Joe Kern

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If you like this post, you may be interested in these other things on economics I’ve written:

How The Free Market Fails At Health Insurance

What Every Liberal Should Know: Thomas Sowell’s Basic Economics

Published on January 31, 2010 at 8:02 am  Comments (61)

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1. While income inequality certainly plays a role in the cost of domestic goods, it is not the only factor. Tax and regulatory regimes also play an important role.
So does market size and structure. For example, the same goods are often more expensive in Canada because American retailers are bigger, and thus able to get better wholesale prices.
And some goods are just more expensive. Housing costs are higher in some countries than others, often for reasons having little to do with, say, construction wages.
Aside from the cost of domestic goods, there is also the question of whether cheaper foreign goods are available, and what proportion of spending goes to foreign goods. This is related to free trade vs protectionism, but also geographic location, or the equality of the country’s neighbourhood.

2. I get the diff bw PPP and nominal. The chinese is poor relative to the American in both dinner and video player. How does that make Chinese PPP measures higher than than the nominal and how do one read the relativity of the countrys PPP in relation to anouther country’s measurement?

3. Just Amazing, what an explanation!!! U rock MR. U just rock. Thanks a ton for such an elaborate and conclusive explanation. I really fell in love with the way you unfolded your wisdom… thanks again

4. Great article man. This really answered a lot of questions for me.

5. BEAUTIFULLY EXPLAINED FOR ANY LAYMAN TO UNDERSTAND. THANKS.

6. Very informative post. But as per wikipedia the GDP ppp of Saudi Arabia is \$53,149. Why it is low in your list?. Please reply.

7. Why is PPP for Korea so overinflated? Prices for food, utility, cars, electronics are so overpriced here. Living costs in Seoul is comparable to that of NYC

8. This is a thorough explanation of an under developed, developing and developed countries in excess of their total wealth and purchasing power.

9. Ooops
Triple PPP (not GDP/capita!), just like Venezuela etc…
My mistake!
Although, a good chance to read you explanation about US PPP, which was really great.

10. Hello. I googled “GDP – PPP diffrerence” (trying to understand why the figures are SO different, for example in Cuba) and found your post – which is VERY enlightening.
Indeed, the US inequality + abundance of land, explains why developed countries usually have GDP>PPP, per capita.
Of course, Cuba has a triple GDP compared to PPP (exception, for a poor country)

P.S I’m Greek, btw, and our GDP is falling, for the last 6 years 😦

11. Hello.. As am a engineering student from india i too got a clear idea about those two differences.. I think it could only be a clear explanation..

12. Nice explanations, but this is written by an american for americans …
“But in all of the most developed countries except the US, the nominal is higher”, really ?
Germany, France, Singapore, Italy, Spain, South Korea, Hong Kong, Qatar … All have PPP greater than nominal GDP, and they are quite developed countries.

13. I’m a drop out but now……………
So much informative that I cannot articulate it in words.
I’d been so keen and desperate to lern the differences between GDP PPP and Nominal. Now the concept is crystal clear. The internet is no less than my guru.

14. very good..you don’t know anything..making fool of people

15. Nicely explained. I don’t have economics background but well understood.

16. Nice explanation besides my being from an engineering background I could understand properly. Can you please suggest some other posts that are related to economics?

17. Amazing yet impressive. Once reading this, I’m interested in Econs more.. lol

18. Simply the best Article I ever read about the topic, Thanks for making it dead simple so everyone can understand.

Since you are good at economics can you please explain how China is the largest creditor to USA, +what is a Creditor, and how does this (china is the largest Creditor to USA) matters to US.

19. Why can’t you use the word Chinese to describe the Chinese people or people in China, instead of Chinaman. Is an American a USman? Chinaman has a negative connotation attached as if you did not know.
Your post was informative but was turned off by how you intentionally used something negative to describe a people you seemingly have no understanding of. You are a disappointment.

• “Chinaman” is an inside joke from the movie The Big Lebowski (“not the preferred nomenclature”). But since this post is a top hit when you search for this topic, and the vast majority of people who read this have surely never seen that movie and would not get the joke, I took it out.

20. goodness gracious! I’m Chinese-American. Is this written by a hillbilly.

• “Chinaman” is an inside joke from the movie The Big Lebowski (“not the preferred nomenclature”). But since this post is a top hit when you search for this topic, and the vast majority of people who read this have surely never seen that movie and would not get the joke, I took it out.

21. very beautifully explained. It would be nice if you can dwell sometime on the perfect indicator that one should look to know the real growth. I have referred to the IMF-World bank data sets i am confused about all the indicators talking about GDP.

22. Great explanations. It is better if you are my economics teacher.

23. nice explanations.
So does it mean a US man can purchase goods worth \$ 46800 whether local produce or International products, while as a Congo man can purchase goods of local origin worth \$329 and if he wants to buy inter’nal products , he can buy up to worth \$185 only. So his international access is limited…Am i right ?

24. Well understood.thank u

25. Great post. But in paragraph six did you have it mixed up? You said a Chinaman is slightly poorer in dinners than the American. Wouldn’t that be the other way around in that example based on the data you provided?

• I think the math is:

Chinese: \$2 dinner \$20 wage= dinner is 1/10 of wage, i.e., 10%
American: \$10 dinner \$150 wage = dinner is 1/15 of wage, i.e., 6.7%

Is there an error in there?

• There is no error, Chinaman spend more percentage of its income on food( if compared with american) hence making chinaman more poorer and reducing his ability to buy dinner for himself.

• No error, you don’t even need to go that far in the math. You could even stop at Chinese man can buy 10 dinners and American can buy 15 dinners based on their wages. 10 dinners are less so that’s why ‘slightly poorer’.

26. good one !

27. Nice explanation.

28. The difference provided by the writer is wonderful and very informative and can be very easily understood.

29. I m very poor in this section but I understood this explain very well.
Thanks ….

30. very clearly and precisely said

31. Many times ,gdp,nominal..etc..of countries,gives different data in the same year.ex imf,world bank,…which data is correct?

32. Excellent. Clear and Concise.

33. Good One .. Really simply elaborates the concept of PPP 🙂

34. Amazing!!

35. Well explained. Can easily understand.

36. very clear than many thoughts I got in the classes.

37. Best explanation ever provided!!

38. thanks man. A confussion I had for so long but now I know the difference.

39. Good one..

40. […] […]

41. simple yet effective explanation.

42. Very clear. This is the first time that i am writing a comment about a blog.

43. Simple & Straight explanation !

44. Fantastic!

45. you are the best. that’s very very useful for me. thanks a lot.

46. That was a great Lecture

47. Great article,and excellent writing. Made me continue reading even though am not into economics, i just wanted to know the difference between nominal and ppp. I wish there was an authors name around…

48. I agree with all the above comments..I wish my economics teacher was as good…

49. Excellent explain,,,,,,,,, sir kindly explain also some other topics related to economy which help out economist in future.

• I am very thankful to you for explaining the terms GDP PPP & GDP Nominal thanks a lot Hammad PHD scholar

50. Simple example helped me to understand gdp nominal and ppp. Thanks for the simple explantion suitable for people like me other than economist.

51. Great explanation..:-D

52. Really well explained.. Simple & Effective.. Thanks

53. awesome post, thanks for the easy explanation 🙂

54. One of the smoothest explanations I have come across. Simply beautiful !

55. kool