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What Is the Connection Between GNI and PPP?

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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 24 October 2014
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Gross National Income (GNI) and Purchasing Power Parity (PPP) can be closely related, as GNI may be expressed in terms of PPP for comparison purposes. This GNI and PPP adjustment allows viewers to generalize financial declarations on an international scale, so they better understand metrics from different countries. Numerous organizations maintain frequently updated references on the GNI of various nations around the world, adjusted by PPP for convenience. The GNI and PPP connection is important to consider when looking at these documents.

To calculate GNI, analysts look at the total value of goods and services produced within a given time period, such as a year. It is very similar to the Gross Domestic Product (GDP), which measures the same characteristics. With the GNI, however, analysts also evaluate things produced overseas that add value to the nation, looking at what residents produce regardless of where it’s located. Thus, products made in Africa for a company based in Britain would be part of Britain’s GNI.

For PPP calculations, analysts look at purchasing power by nation, recognizing that simple currency conversions don’t account for inflation and other factors. They convert to a uniform hypothetical international currency, looking at what a dollar’s worth of that currency would buy in any nation around the world. A loaf of bread might cost $3 in this hypothetical currency in one nation, but $6 in another, showing that a dollar goes further in some places than others.

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Looking at GNI and PPP, researchers want to be able to accurately depict information about a country’s financial status and economy. Just listing GNI doesn’t provide enough context, because people don’t know how the country compares to others. Listing information with adjustments for PPP allows for cross comparisons; a country might look like it has a high GNI, for example, but when compared with other countries after adjustment for PPP, it might appear less impressive.

The connection between GNI and PPP is important for analysts, because when numbers are adjusted, it is important to know which metrics were used. Information about the GNI and PPP conversion can be important in the future when researchers want to evaluate the validity and usability of the data. Some charts may provide raw data in addition to PPP adjustments so viewers can check the math themselves. PPP conversions can also be used for discussions of other financial matters, to provide a context and base for comparison to make these topics easier to understand.

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