What is the difference between nominal GDP and GDP at PPP?
Short answer
Nominal GDP converts a country's output into US dollars at market exchange rates, so it shows what that output is worth on currency markets. GDP at PPP converts it at purchasing power parity rates, which equalize the price of a common basket of goods, so it shows what the output can buy domestically. PPP figures are usually higher for economies with lower price levels.
Both measures start with the same number: a country's gross domestic product in its own currency. They differ in the conversion rate used to turn it into a single currency for comparison.
How is nominal GDP converted differently from GDP at PPP?
- Nominal GDP in US dollars uses the market exchange rate:
GDP_USD = GDP_LCU / exchange rate, where the exchange rate is local currency units (LCU) per US dollar. The World Bank series is GDP (current US$), indicatorNY.GDP.MKTP.CD. - GDP at PPP uses a purchasing power parity conversion factor:
GDP_PPP = GDP_LCU / PPP factor, where the factor is LCU per international dollar. The World Bank series is GDP, PPP (current international $), indicatorNY.GDP.MKTP.PP.CD, and the factor itself isPA.NUS.PPP.
An international dollar is a hypothetical currency with the same purchasing power over GDP that the US dollar has in the United States. PPP factors come from price surveys run under the International Comparison Program (ICP), a global statistical initiative coordinated by the World Bank. The World Bank's PPP series also draw on the Eurostat and OECD PPP programs.
How do the two measures compare for a hypothetical country?
The numbers below are hypothetical. A country produces 12,000 billion units of its currency. The market exchange rate is 40 units per US dollar, and the PPP factor is 20 units per international dollar.
| Measure | Calculation | Result |
|---|---|---|
| Nominal GDP | 12,000 / 40 | 300 billion US dollars |
| GDP at PPP | 12,000 / 20 | 600 billion international dollars |
| Price level | 20 / 40 | 0.5 |
The ratio of the PPP factor to the exchange rate (20 / 40 = 0.5) is the price level relative to the United States: a basket that costs 1 US dollar in the United States costs the equivalent of 0.50 US dollars at the market rate in this country. That is why PPP GDP is twice nominal GDP. In a spreadsheet, put the three inputs in B1:B3 and calculate =B1/B2, =B1/B3 and =B3/B2.
Which measure should I use, nominal GDP or GDP at PPP?
| Question | Better measure |
|---|---|
| How large is the economy in terms of international trade, finance or debt in dollars? | Nominal GDP |
| How much can people in the country buy with their income? | GDP at PPP |
| Comparing living standards across countries | GDP per capita at PPP |
| Comparing the physical size of economies | GDP at PPP |
| Share of world output priced in market dollars | Nominal GDP |
Nominal GDP moves with exchange rates. A currency that falls by 10 percent against the dollar lowers the country's nominal GDP in dollars by about 10 percent, even if nothing changed in the economy. PPP-based figures do not react to exchange-rate swings in the same way, which is one reason they suit comparisons of living standards.
What limits should I keep in mind with PPP GDP figures?
- PPP factors are estimates from price surveys, and they are benchmarked in periodic rounds of the ICP. Values between rounds are extrapolated, and revisions can be large when a new round is released.
- A single basket does not match every household, so PPP is a comparison tool, not a measurement of each person's cost of living.
- Nominal and real are a different distinction. Both measures here can be in current prices, which include inflation, or in constant prices, which adjust for it. Real GDP growth is calculated in constant prices.
The GDP by country sheet carries the World Bank's GDP series in current US dollars alongside per-capita values and growth rates. The blog post on current, constant and PPP GDP data explains the three versions in more detail. Credit the World Bank when you publish figures, following how to cite World Bank data.