MAKING SENSE OF GDP GROWTH AND POVERTY

The fifth-largest aggregate GDP is based on official exchange rates. If PPP exchange rates are used for conversion, Indian GDP is already the third-largest

- Bibek Debroy

INDIA'S aggregate GDP has become the fifth-largest in the world, overtaking the UK's. Any country's GDP is in its own domestic currency. In India's case, it is in rupees.

To make cross-country comparisons, that has to be converted into a common yardstick or numeraire, typically the US dollar. This can be done using official exchange rates, for instance, roughly 80 rupees to 1 dollar. However, 80 rupees can purchase more in India than 1 dollar can in the USA.

If everything could be freely traded, all prices would equalize across borders. Such free trade doesn't happen because some items cannot be traded. Economists refer to them as non-tradables. Services are an example. A haircut will be cheaper in India than in the USA. Hence, a notion of purchasing power parity (PPP) has evolved.

The fifth-largest aggregate GDP is based on official exchange rates. If PPP exchange rates are used for conversion, Indian GDP is already the third-largest, right behind China and the USA. A slightly flippant example of PPP is the Big Mac Index, based on how much a Big Mac burger costs in different countries. To compute PPP, we need data on prices in different countries through surveys.

There is an International Comparison Programme (ICP) to gather prices on a common basket of goods and services across countries and it is subject to criticism.

There are also time-lags. Present PPP data, collected through Asian Development Bank, are actually from 2017. But to state the obvious, any PPP conversion will relatively increase aggregate GDP, compared to official exchange rates, for a country like India, and relatively decrease it for a country like the USA. There is no inconsistency in this. They measure different things.