6. How large is the economy of India? Indian GDP in 2010 was 78.9 trillion rupee

Question

6. How large is the economy of India?

Indian GDP in 2010 was 78.9 trillion rupees, while U.S. GDP was $14.5 trillion. The exchange rate in 2010 was 45.7 rupees per dollar. India turns out to have lower prices than the United States (this is true more generally for poor countries): the price level in India (converted to dollars) divided by the price level in the United States was 0.368 in 2010.

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 United States in common prices?

c) Why are these two numbers different?

Explanation / Answer

a) Lets convert GDP of INdia in dollars from rupees.

1 dollar = 45.7 Rupees

1/45.7 dollar = 1 Rupee

1/45.7 * 78.9 trillion dollars = 78.9 trillion rupees

1.726 trillion dollars = 78.9 trillion rupees

1.726 trillion dollars was the worth of GDP of INdia in 2010.

Hence, ratio of Indian GDP to U.S. GDP = 1.726 trillion dollars / 14.5 trillion dollars = 0.119 or

Indian GDP = 11.9% of US GDP.

b) It is important to control for price dierences between the two countries. Although the Indian GDP is only 1.726 trillion dollars, the prices of goods and services are likely to be cheaper here. The problem points out that prices in India are approximately 0.368 (or36.8%) of U.S. prices.

Controlling for price dierentials the Indian GDP = ratio / converted price level = 0.119/ 0.368 = 0.323 or the Indian GDP (in terms of purchasing power) is 32.3% of the U.S.GDP.

c) Because the second measure accounts for the same goods costing less in India.

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