Explain the terms GDP, GDP-P and PPP. Bring in a correlation between the three through an example.

Answer:

Nominal GDP is GDP, which is determined using the prices of the year or quarter to which GDP is related. With rises in real production and even changes in general price inflation, nominal GDP can rise or decrease over time. Nominal GDP, therefore, is compared to real GDP. The price level of one specific year (the base year) is used by actual GDP and therefore excludes the impact of price inflation. Compared to countries, nominal GDP often represents current market exchange rates (if, say, you equate two countries' GDP in current dollars, as is usual).

GDP per capita is the GDP that is divided by the population of the region to which GDP refers. A fundamental indicator of the quality of life in a place is GDP per capita, and, more specifically, actual GDP per capita. Instead of market exchange rates, PPP GDP uses Purchasing Power Parity exchange rates to equate the GDP of two nations. The PPP is an exchange rate that, given the exchange rate, sets the cost of a standard collection of goods and services equal in both countries. For example, if a hamburger costs $3.00 in the US but costs 300 yen in Japan, the yen-to-dollar PPP exchange rate will be 100 to 1. PPP exchange prices are also the rates we expect to tend toward market exchange rates, and since multiple items globally do not sell at the same effective price, there are great possibilities for arbitrage that would drive the exchange rate down to PPP.

Therefore, PPP GDP is another means of ensuring that we equate actual production, not any peculiar consequence of fluctuations in exchange rates.