GNP-PPP-- The Big Mac Standard

The existence of about 180 national currencies and their fluctuation in values against one another make it difficult to evaluate any country's financial status by using standard measures, such as gross domestic product (GDP). Using the U.S. dollar as a standard and calculating exchange rates, several countries (and their 1996 per capita GDPs) were: United States ($26,980), Germany ($27,910), Kenya ($280), and Russia ($2,240). Many economists argue that these figures do not present an accurate picture because they do not reflect the prices for commonly consumed local products such as housing, public transportation, movies, and fast food. One way the Union Bank of Switzerland (the world's third largest bank) keeps track of these relative factors is by using the ubiquitous Big Mac as a standard to measure relative prices. According to the bank, the number of hours a worker has to spend to purchase a Big Mac, given average wages, is: American (11 minutes), German (18 minutes), Russian (2 hours), and Kenyan (3 hours). While, for instance, a Kenyan has to work 16.4 times as long as an American to earn enough to purchase a Big Mac, the U.S. GDP is 96.4 times larger than Kenya's GDP.

To adjust GDP to reflect the actual cost of living in various countries, the World Bank and other financial institutions use GDP-PPP (Purchasing Power Parity), which uses a "market basket" of items "not traded on international markets" (that is, like Big Macs, locally produced and consumed) as one way to compare standards of living. By this standard (and using the United States as the base), the above countries (and their 1996 per capita GDPs) were: United States ($26,980), Germany ($22,110), Kenya ($1,380), and Russia ($4,480). Note that, compared to the U.S. data, Germany had a higher GDP and lower GDP-PPP, whereas the GDP-PPPs of Kenya and Russia were higher than their GDPs. One of the most dramatic differences is Japan, which had a GDP of $39,640, some 47 percent larger than the U.S. GDP. Japan's very high prices, however, put its GDP-PPP at $22,110, about 18 percent lower than the U.S. GDP-PPP.

It is important to see that neither the standard GDP nor the newer GDP-PPP is a fully accurate measure. GDP does not take prices of locally produced and consumed items into account. But GDP-PPP misses the fact that many items we all consume come through international trade, and the price of a barrel of imported petroleum, an imported Toyota, or an imported Mac--in this case the computer--is pretty much the same, whether you are paying for it in U.S. dollars, German marks, Kenyan shillings, or Russian rubles.