GDP at official exchange rate vs a standard currency such as the US dollar, obviously. That’s how GDP is usually measured in comparison tables.
I mean, you did notice that according to that funny PPP table, India had a higher GDP than Germany or France, and China had nearly half the GDP of the USA, right? You think an evaluation method that gives such bizarre results is in any way useful?
GDP at PPP can be amazingly high for the poorest country, as long as they have lots of extremely cheap basic necessities, which can be produced for instance by very low standards of quality or government intervention. That doesn’t mean the country is wealthy in any realistic sense.[/quote]
But that’s not the way purchasing power parity works. The only reason the poor countries of India & China are on that list is that they have nearly a billion people apiece. Yes, there’s still issues with somewhat incomparable purchasing sets across countries, but China (assuming they’re not exaggerating their numbers even more than I think) really does have that total income; a billion people making $2000 a piece is the same national income as a hundred million people making $20,000 a piece. That doesn’t mean they can marshall as much in the way of resources for a military, or influence, but that’s because their “cash left over per capita after necessities” is small.
For various technical reasons, exchange rates aren’t superior.
Here’s a pretty good summary. Most interestingly:
Other market participants - Notice that in the PPP equilibrium stories, it is the behavior of profit-seeking importers and exporters that forces the exchange rate to adjust to the PPP level. These activities would be recorded on the current account of a country’s balance of payments. Thus, it is reasonable to say that the PPP theory is based on current account transactions. This contrasts with the interest rate parity theory in which the behavior of investors seeking the highest rates of return on investments motivates adjustments in the exchange rate. Since investors are trading assets, these transactions would appear on a country’s capital account of its balance of payments. Thus, the interest rate parity theory is based on capital account transactions.
It is estimated that there are approximately $1 trillion dollars worth of currency exchanged every day on international Forex markets. That’s one-eighth US GDP, which is the value of production in the US in an entire year! Plus, the $1 trillion estimate is made by counting only one side of each currency trade. Thus, that’s an enormous amount of trade. If one considers the total amount of world trade each year and then divide by 365, one can get the average amount of goods and services traded daily. This number is less than $100 billion dollars. This means that the amount of daily currency transactions is more than ten times the amount of daily trade. This fact would seem to suggest that the primary effect on the daily exchange rate must be caused by the actions of investors rather than importers and exporters. Thus, the participation of other traders in the foreign exchange market, who are motivated by other concerns, may lead the exchange rate to a value that is not consistent with PPP.