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What Is the Relationship Between GDP and PPP?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 14 August 2014
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Economics can be a nationwide study on the fiscal attributes of a country. Two important attributes are gross domestic product (GDP) and purchasing price parity (PPP). GDP represents all goods — in terms of market value — produced by a nation; PPP is an economic theory on exchange rates between companies. A relationship exists between GDP and PPP because nations desire information on the price of a single item in each nation’s currency. Fluctuations in these prices may occur, causing the goods from one country to be more expensive or vice versa.

GDP and PPP are economic computations that can determine the strength of a nation’s economy. For example, a company that is experiencing natural economic growth tends to have positive GDP figures, which represent an increase in the market value of goods. Inflation can be a naturally occurring phenomenon in growing, free-market economies. The classical definition of inflation is too many dollars chasing too few goods. When this occurs, a country's PPP can also fluctuate due to the changes in currency value due to inflation.

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Many economies require raw materials from another nation in order to produce goods. The exchange rate is determined partly due to the economic GDP and PPP figures in an economy. For example, a company in the United States may exchange American currency into Euros in order to pay for materials obtained from a country in the European Union. If inflation has weakened the U.S. dollar, more dollars are necessary to purchase Euros and thus pay for the goods. A common measurement used in GDP and PPP analysis is the price measurement for a basket of goods.

In economics, a basket of goods often represents items that most families in a nation need to live a standard lifestyle. The goods change from country to country as the goods are different for each group of citizens. The total market value of the basket is often a historical trend analysis. As the prices increase — which is most common as deflation is rare compared to inflation — PPP exchange rates will also fluctuate. When inflation occurs too much in a country, other countries may choose to do business elsewhere as spending more money for the same amount of goods is typically unfavorable.

GDP and PPP analysis may also help economists create reports on the price of goods in an international market. For example, companies may desire information on purchasong teak wood for furniture production. A review of all countries with teak wood for sale will be in the PPP report. Oftentimes, the country with the most favorable exchange rates will be at the top of the company’s list.

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