Economic Growth and Development

increases in the nominalvalue of output: higher prices of ice creams increase
the value of output. Statisticians make adjustment to focus on the realvalue of
output by stripping out the impact of inflation, for example using ‘2005
prices’, so measuring output over an extended period of time at the market
price prevailing in 2005.
Statisticians add together the monetary values of output such as the prices
of ice creams and computers in the local currency. Once calculated, GDP is
usually converted into a single currency (the dollar) to enable international
comparisons. There is a significant problem with this process: the values of
currencies fluctuate against each other over time on international financial
markets. The value of the Indian rupee, for example, has fallen sharply against
the dollar over the past few years. Sometimes statisticians use current market
exchange rates, or to avoid short-term fluctuations they use an average of the
market exchange rate over several years. A common if complicated adjust-
ment is to use purchasing power parity (PPP) exchange rates. This allows for
the fact that prices differ systematically between developed and developing
countries. With labour much cheaper (wages are lower) in poor developing
countries a dollar can buy a lot more of the goods and services produced by
labour-intensive methods, such as haircuts. By contrast, refining petroleum is
mainly done by computers and machinery so cheap labour will have little
influence on the final costs which will differ little between developed and
developing countries. Making adjustments for lower prices in developing
countries means that actual living standards are often considerably higher than
is suggested by straightforward measures of GDP per capita. Table 1.2 shows
that incomes nearly double in China, Senegal and the Congo when adjusted
for PPP. GDP per capita incomes in the Congo are 0.25 per cent of those in
Luxembourg and when adjusted for PPP, 0.53 per cent – the income gap is
halved but remains enormous.

Thinking about Growth 25

Table 1.2 GDP per capita and GDP adjusted for PPP

Country GDP per capita, 2011 GDP per capita,

PPP-adjusted, 2011

Luxembourg 77,390 64,110

France 42,420 35,910

Ireland 39,150 33,520

Poland 12,380 20,260

Chile 12,280 16,300

Brazil 10,720 11,420

China 4,950 8,390

Senegal 1,070 1,940

Democratic Republic of Congo 190 340

Source: Data compiled from World Development Indicators(2013).