International Comparisons of Real Product and Purchasing Power

TLDR

Converting GDPs to a common currency using market exchange rates is misleading, especially under managed floating regimes where rates can shift 20 % annually, underscoring the inadequacy of exchange‑rate conversions. The United Nations International Comparison Project aims to compare the purchasing power of currencies and real GDP per capita across countries. The ICP found that a country's currency purchasing power can be up to three times its dollar exchange rate, making real GDP per capita three times higher than exchange‑rate conversions suggest.

Abstract

The purpose of the United Nations International Comparison Project (ICP) is to compare the purchasing power of currencies and the real gross domestic product (GDP) per capita of different countries. It is well known that the usual method of converting the GDPs of different countries to a common currency, usually U.S. dollars, at existing exchange rates is misleading because exchange rates do not necessarily reflect the purchasing power of currencies. The ICP has found that the purchasing power of a country's currency over GDP can be as much as three times its dollar exchange rate, and thus the real GDP per capita is three times the value shown in an exchange-rate conversion. The unsatisfactory nature of exchange-rate conversions has become even clearer in the past few years under the new regime of managed floating rates. Changes in exchange rates of as much as 20 percent within the space of a year have not been unusual even among major currencies.