Question

Figure 8-5 on Page 181 of your text displays the combined real GDP of Asia as a percentage of the combined real GDP of the entire world. The figure displays this percentage according to two different measures. One measure uses prevailing exchange rates in currency markets to adjust all countries’ real GDP levels to allow for comparisons. The other measure uses purchasing power parity adjustments. Utilizing market exchange rates indicates that Asian real GDP’s share of global real GDP generally rose steadily between 1980 and the mid-1990s from less than one-fifth to slightly more than one-fourth of global GDP. In contrast, purchasing power parity measures of real GDP indicate that Asia’s measured share of the world economy has grown to more than 35 percent. Another measure for comparing the relative “economic sizes” of Asia and the world is per capita real GDP. This measure also can be computed using either foreign exchange rates or purchasing power parities to allow for cross-country comparisons. When per capita real GDP is computed using foreign exchange rates, Asian per capita real GDP is only 11 percent of global per capita real GDP. When the tabulation uses purchasing power parity adjustments, Asian per capita real GDP is 26 percent of global real GDP per capita. Thus, both measures indicate that although Asia’s economic size has risen in relation to the world as a whole, Asia’s per capita real GDP remains relatively low. Even though Asian real GDP is relatively high, so is Asia’s population, which is why the region’s per capita real GDP remains only a fraction of the global level.

a. Why is there such a difference in Asia’s share of global real GDP, depending on whether the computation uses purchasing power parities or exchange rates?

b. Why is Asia’s “economic size” so much smaller on a per capita basis than on an absolute basis? For a recent analysis of the growth of Asia’s share of global economic activity, go to www.econtoday.com/chap08. To learn about a recent claim that China’s economy is already “larger” than the U.S. economy, go to www.econtoday.com/chap08.

Answer 1

a The reason is that exchange rates tend to underestimate the real purchasing power of countries or regions whose GDP is low compared to developed countries. Infact the underestimation is greater the greater the country or region is underdeveloped. Purchasing power parity takes into consideration the real purchasing power of currencies

B Asia's economic size is so low on per capita basis than on absolute basis because of higher population in Asia. Per capita economic size reflects the effect of large population in denominator. Mathematically greater the denominator smaller the size of ratio given the numerator. That is why on per capita basis economic size is smaller. On the other hand in USA or Europe population is low and thus economic size is larger