Question

Cross-country comparisons of GDP per capita

typically use purchasing power parity equivalent

exchange rates, which are a measure of the long-run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could use market exchange rates, which sometimes change dramatically in a short period of time, be misleading?

Short answer

Different currencies are used by different countries. Every country's GDP is calculated in its own currencies. To compare the GDP of different nations, different currencies must be converted into a common currency, which is done through exchange rates.

Step-by-step solution

Why different currency?

Currency value swings are influenced by supply and demand. Currency may be bought and sold just like anything else. As you'll see below, the supply and demand for a currency may change based on a range of factors, including the attractiveness of a nation to investors, commodity prices, and inflation.

Explanation

Because market exchange rates may fluctuate substantially in a short period of time, comparing GDP per capita between nations might provide quite different results depending on the day.