Question

Indian GDP in 2014 was 119 trillion rupees, while U.S. GDP was $16.5 trillion. The exchange rate in 2014 was 61.0 rupees per dollar. India turns out to have lower prices than the United States (this is true more generally for poor countries): the price level in India (converted to dollars) divided by the price level in the UNited States was 0.280 in 2014.
a) What is the ratio of Indian GDP to U.S. GDP if we don't take into account the differences in relative prices and simply use the exchange rate to make the conversion?

b) What is the ratio of ral GDP in India to real GDP in the United States in common prices?

c) Why are these two numbers different?

Answer 1

Answer:

Given that

India GDP = 119 trillion rupes

USA GDP = $16.5 trillion

61 rupes = 1 dollar

Therefore

India GDP = 119/61 = $1.95 trillion.

a. Ratio of India GDP to US GDP

= 1.95 : 16.5

That is (1.95 ÷ 16.5) × 100

= 11.818%

Thus,

India GDP is approximately 11.82% of USA GDP.

b. Given that price level = 0.280

Thus,

Real GDP ratio

= 0.11818 ÷ 0.280

= 0.422

Therefore, in terms of purchasing power, India GDP = 42.2% of USA GDP.

c. The reason why they are different is because the second ratio accounts for the facts that goods and services costs less in India than in USA.