Comparing Economic Performance across Countries

• The exchange rate:
  • Price at which different currencies are traded.
• To make comparisons of GDP across countries we must take the following steps:
  • GDP must be expressed in a common currency by first adjusting it by the exchange rate.
  • This value of nominal GDP must be multiplied by the ratio of prices in the countries.

Example: China and United States

• First, use the exchange rate to turn Chinese yuan into U.S. dollars.

• Adjust for relative price level of goods.

• Price level ratio is about (1/0.3), so the real GDP of China is $11.7 trillion.
• Comparison of countries:
  • In general, rich countries tend to have higher price levels than poor countries.
  • This is mainly because poor countries have lower wages.