Purchasing power parity

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Presentation transcript:

Purchasing power parity Y12 Economics - September 2016

Comparing GDP and Growth in GDP between countries…..who’s winning? If GDP/Capita in US is $60,000 and GDP/Capita in Japan is ¥4,000,000 who is richer?

PPP – Purchasing Power Parity – sounds complex buts its easy  PPP measures how much you can buy of the same good in each country? $4.00 We use PPP to change GDP figures into US$ at an exchange rate that takes account of purchasing power

What Exchange Rates to compare GDP between countries? We use the costs of similar goods in Japan and USA to set the exchange rate to compare GDP. Lets say we just use the price of Big Macs: A Big Mac costs ¥200 in Japan, $4 in USA. So the Purchasing Power Exchange Rate is ¥200/$4 = ¥50/$1 or ¥50 per $1 = $4.00

Exercise to work out PPP exchange rate: An iPad in Japan costs ¥25,000 An iPad in USA costs $500 What is the Exchange Rate of Japanese Yen to US Dollars based on Purchasing Power Parity (PPP)? Find the PPP exchange rate by DIVIDING the non-USD value (ie £, €, ¥ etc.) by the USD value.

Putting it all together: GDP per capita in Japan is ¥4,000,000 (Japanese Yen) GDP per capita in US is $60,000 (US Dollars) Who is better off? Lets convert the ¥4,000,000 to USD using PPP. So convert ¥4,000,000 to $ at a rate of 50 to 1……… ¥4,000,000/50 = $80,000 SO…..on a PPP measure, the average Japanese person enjoys $80,000 GDP/Capita but the average US person enjoys just $60,000 GDP/Capita Based on Purchasing Power, Japanese GDP/Capita is beating the USA

Its about finding a fair exchange rate reflecting purchasing power… There are several baskets of identical goods set up in the classroom. Go and find one and add up what it would cost in that countries currency…. Compare it to the USD basket and work out the PPP exchange rate

Now put the following GDP/Capita figures into USD and order from biggest to smallest. ¥4,000,000 (Japan) A$100,000 (Australia) £35,000 (UK) $60,000 (USA) €55,000 (France)

For use in lesson

“Basket of Goods”

Market Exchange Rates are those used by Banks and what you use when changing money when on holiday. $1 = £0.50 $1 = €1.00 $1 = ¥100 $1 = A$2.00