GDP indicates the total value of the goods produced in a particular country within a given financial year. This calculation also includes the value of all the goods and services produced by any foreign company within the county’s border. But it does not count more than that. Our obsession with the GDP comparison might not be a healthy strategy to compare the economy given the fundamental flaw it has. Nobel Laureates Joseph Stiglitz argued this flawed concept in his book “Beyond GDP”. GDP takes count of everything that has a market price but it cannot say whether the quality of life has improved or not, whether everyone has received the benefit of that growth or not, whether it has reduced inequality or not, whether the growth is sustainable or not, and so on.
However, for the sake of estimation, GDP might provide a notion about the economic condition. But comparing nominal per capita GDP with other countries might not be a good strategy as it uses the market exchange rates for conversion. It does not take into account differences in the cost of living in different countries. Any fluctuation in the exchange rate might impact the country’s GDP ranking, even if they often make little or no difference to the standard of living of its population. PPP basis arguably more useful when comparing differences in living standards between nations. A haircut in London is more expensive than in Dhaka; the price of a taxi ride of the same distance is higher in Paris than in Delhi, and a ticket to a movie costs more in New York than in Lahore. PPP is an exchange rate at which the currency of one country is converted into that of the second country in order to purchase the same volume of goods and services in both countries. If a hamburger is selling in New York for £2 and in Dhaka for $4, this would imply a PPP exchange rate of 1 USD to 2 BDT. PPP exchange rates are relatively stable over time. In some cases, one country might have a lower nominal GDP than others, but higher GDP in PPP basis indicates a better purchasing power.
Take for example, based on 2019 data, there are three countries namely Uzbekistan, Pakistan, and Myanmar, two of which is Bangladesh’s neighbor, whose nominal per capita GDP is less Bangladesh’s 2019 number— $1,906— but higher than PPP based GDP per capita— $5,028. Though Uzbekistan’s per capita GDP on a nominal basis ($1832) is less than Bangladesh, they can have 2 meals with the cost of our 1 meal indicating a low cost of living.
So, from this data, it can be imagined that with the same income, if a person in Bangladesh can buy 1 shirt per month, he or she will be able to buy 2 shirts in Uzbekistan. That is why with the same amount of income people in Pakistan or Myanmar can lead the same quality of life in the respective countries as well as saving a fortune for the future. So, though the Per Capita Income in nominal basis is showing a good figure, but the purchasing power is lower in Bangladesh than Uzbekistan. Recently, Bangladesh’s GDP Per Capita in nominal basis for 2020 has been forecasted by IMF as USD 1,888 which has surpassed the Forecasted GDP Per Capita for India which is USD 1,877. Like the previously mentioned scenario, though the GDP Per Capita of Bangladesh is greater than India in absolute basis, if this GDP per Capita is calculated in Purchasing Power Parity basis, Bangladesh has a forecast of USD 5,139 which is less than that of India. On PPP basis, India has a GDP Per Capita of USD 6,284 which is greater than Bangladesh.
Evidently, Purchasing Power Parity shows the actual price of a common set of products that can be bought at different prices in different countries. The difference between the nominal GDP and the Nominal GDP calculating with Purchasing Power parity describes the economic condition of a country. In the case of developing countries, the difference is larger. But in the advanced countries, the difference is less as developing countries tend to have a lower cost of living than developed ones.
So, higher GDP does not mean a healthier economy, rather the development in Purchasing Power Parity shows a clearer picture when comparing the GDP. However, the drawback of PPP is that PPP is harder to measure than nominal.