Briefly comment on the importance of PPP in measuring the economic growth of a country Explain with practical example 6 Marks
The simplest explanation of PPP is:
PPP is the relative ability of two countries' currencies to buy the same 'basket' of goods in those two countries
or stated differently
Purchasing power is the value of goods and services that can be purchased with one unit of a country's currency.
For example if the Rand is trading R7 to the dollar
If I buy XYZ in SA for R700, I must be able to buy the same XYZ in Country using the dollar for 100 dollars. (1 dollar – R7)
PPP is obtained when GNP, GDP and GNI are adjusted by introducing the concept of purchasing power.
The rational for introducing Purchasing power parity is to have a better comparison of the relative living standards of populations in different countries. This is mainly done because the per capita GNP and GDP and GNI results have two inherent shortcomings,
1. First. they don't consider differences in cost of living between countries and,
2. secondly, they provide a static picture of economic development at a specific point in time
Without PPP it is difficult to measure whether existing gaps between the economic levels of different countries are narrowing.
Thus PPP gives a more equitable measurement of the economic growth of any two countries.
An example Mozambique, had a per capita GNI of only US$210. compared to Switzerland's US$39 880, these large discrepancies would make it very difficult to make an equitable comparison of growth.
PPP further provides valuable information on reliable income, consumption and buying patterns of a population.