Let’s say Country A has 100 Money (nominal GDP) and Country B has 50 Money (nominal GDP). Rent in Country A is 50 Money and Rent in B is 10 Money. By PPP, Country B is way richer but that can’t be right surely?
If the (international) price of a barrel of oil is 30 Money then Country A can afford 3 barrels and have 10 Money left over but country B can only afford 1 barrel.
So isn’t Country A clearly the richer country?
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>So isn’t Country A clearly the richer country?
Country A is richer *if all they want to buy is oil*.
But all countries buy a mix of things. Some of them will be bought at international rates. Others will be bought at local rates.
PPP measures try to take into account what countries *actually* buy. They will be affected by things like the international oil price, but include other things.
As an example, imagine two countries, one a large, fertile country at the centre of rail, road and sea networks, the other squeezed amid cliffs at the top of an storm-wracked mountain in the middle of an ocean filled with sea monsters.
Both have nominal GDPs of £1bn. But it’s so hard to actually get anything to, produce or do anything in the second country that everything costs twice as much there.
Now, which country is richer? Which country has a higher standard of living, or more ability to do useful stuff with its money?
Or for a more down-to-earth example, think about the Russian military. Nominal Russian military spending is a bit less than the UK’s. However compared to the UK Russia can pay its soldiers less, pay less for domestically produced fuel, domestically produced weapons, etc.. So actually it can do a lot more than you would think based on the nominal spending.
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