India overtakes Britain

Subject: Economy

Section: National Income

Context:Britain has dropped behind India to become the world’s sixth largest economy.

Details:

US>China>Japan>Germany>UK are world top six largest countries in nominal terms
The calculation is based in US dollars, and India extended its lead in the first quarter, according to GDP figures from the International Monetary Fund.
The size of the Indian economy in nominal terms in the last quarter of 2021-22 was $854.7 billion and that of the UK was $816 billion.
- UK GDP grew just 1% in nominal terms in the second quarter and shrank 0.1% in real terms.
- Sterling has also under performed the dollar relative to the rupee, with the pound falling 8% against the Indian currency this year.

Concept:

The economy of India is a middle income developing market economy.
It is the world’s fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP).
According to the International Monetary Fund (IMF), on a per capita income basis, India ranked 142nd by GDP (nominal) and 128th by GDP (PPP).

Nominal GDP vs. PPP GDP

To compare GDPs around the world, currencies must be converted so that they’re consistent across all countries.
- There are two main systems of common currency conversion:
  - Nominal and
  - PPP- Purchasing Power Parity
Nominal GDP
- It is useful for large-scope GDP comparison, either for a country or region or on an international scale.
- The nominal GDP of an area is determined using up-to-date market prices and shifts according to inflation.
- By incorporating an area’s inflation rate in the GDP calculation, nominal GDP can indicate when prices rise in an economy.
- The rate of price increases in an economy is also factored into nominal GDP.
- The main downfall of nominal GDP is that
  - It doesn’t account for the living standards in a country – it focuses only on economic growth and performance.
  - It can differ significantly from year to year depending on variations in the exchange rate.

PPP GDP
- It is used to measure both the economic growth and living standards in a country, making it a useful tool in global comparisons.
- The PPP approach uses exchange rates to convert one country’s currency into the other. Then, using a consistent amount of money, the quantity of goods and services that may be purchased in the countries is compared.
  - For example, PPP may compare the cost of a car in France to the cost of a car in Japan (after using the exchange rate to convert yen to Euros, or vice versa) to analyze the difference in GDP and cost of living between these nations.
- PPP GDP stays relatively stable from year to year and isn’t significantly impacted by shifts in the exchange rate.
- PPP GDP can be faulted for the fact that
  - It doesn’t incorporate discrepancies in quality between goods and services in different countries.
  - In general, it’s less exact than nominal GDP and often hinges on estimates rather than calculations. As such, the nominal GDP is typically used to measure and compare the size of national economies.