How Can You Compare GDP Between Countries?

A reader asks:

Would you please give an explanation of comparison between GDP related to PPP(purchasing power parity) and GDP related to OER (official exchange rate). Which one is the most accurate measure of a country's GDP?

Purchasing power parity (PPP) allows you to compare the GDP between countries. It does this by taking into account the exchange rates between the two countries.

For example, since China holds the exchange rate of its currency, the yuan, to be lower than the dollar, its costs are lower. A can of Coca-Cola, for example, will cost much less in China than in the U.S. This also makes their output, or GDP, much lower. A more accurate comparison will be based, not on the value of the currency, but on what it can buy, or its purchasing power. (For more examples, see my definition of Purchasing Power Parity)

What It Means to You

The CIA Factbook gives you the both measurements of GDP: purchasing power parity (PPP) and official exchange rate(OER). Use PPP when comparing to compare the standard of living between two countries, and OER when comparing one country to itself over time.