Indian GDP in 2000 was 20.9 trillion rupees, while U.S. GDP was $9.8 trillion. T
ID: 1248492 • Letter: I
Question
Indian GDP in 2000 was 20.9 trillion rupees, while U.S. GDP was $9.8 trillion. The exchange rate in 2000 was 44.9 rupees per dollar. India turns out to have lower prices than the U.S. (this is true more generally foor poor countires): the price level in India(converted to dollars) divided by the price level in the U.S. was 0.171 in 2000.a) What is the ratio of Indian GDP to U.S. GDP if we don't take into account the differences in relative prices and simply use the exchange rate to make the conversion?
b) What is the ratio of real GDP in India to Real GDP in the U.S. in common prices?
c) Why are these two numbers different?
Explanation / Answer
a) Knowing the exchange rate is 44.9 means that 44.9 rupees equals 1 dollar. So to find the ratio of the GDPs between India's GDP and America's GDP, we need to equalize the units to either rupees or dollars and then comparing the two GDPs. So either we can divide India's GDP by 44.9 or multiply US's GDP by 44.9 and then divide India's GDP by America's.
b) The Indian price level divided by the American price level of 0.171 explains that something costing 1 dollar in America would cost 0.171th as much in India.
Therefore to find the Real GDP ratio multiply the price level ratio o India's GDP to equalize the price differences, and then divide India's Real GDP to America's GDP to find the ratio.
c) Using these steps we see one main difference, a) equalizes currencies, and b) equalizes price levels, thus the difference in answers.