It is difficult to compare countries using GDP because every goods do not have the same value in every countries around the world. The video suggested that in order to compare one country GDP and other country GDP, somehow sounds reasonable when convert the value using exchanging rate. That's not a big deal to do so except sometime the exchanged rates often swing, they would not stay the same over week or so. And exchanged rate seems to be more relevant to the exchangeable goods. But the problem of measuring is the fact that the final goods and services do not count at the same value.
For example, the exchangeable goods tend to have a similar price in each country but the non- exchangeable goods ( especially services) do not account for the same rules, but why? Non- exchangeable / immobile goods tend to be cheaper in poorer country ( the good example would be labours, it would be much cheaper to hire labour in India than to hire in the States.! ) Hence, the GDP based on exchanged rate would be over estimated in poor country ( they treated the exchangeable goods across the country with the same prices but not that non- tradable are cheaper.)
In order to compare countries' GDP in a more effective way, group of people came up with the PPP ( Purchasing Power Parity) ratio. This theory basically works by setting up a "SAME" type of good and compare how many unit of each country's currency will cost consumer. The example given in the video was pretty clear; the comparing BIg MAC price in the States and Thailand. The Big mac in thailand cost twice cheaper than in the states, this indicates that the standard of living in these two countries are different. The same good contains the same material, but even you convert the prices into the same currency. Thailand appears to have the cheaper price because its standard living is lower than the states's; basically it's cheaper to live in Thailand.
Example for MALAYSIA!
- The oil price in Malaysia is quite reasonable compared to the price in thailand. In thailand, the price of fuel is really expensive ( the price has gone up almost as twice as in Malaysia even though these two countries are next to each other) The fact that Thailand does not have many oil resources as Malaysia does, but if we think in term of "Exchangeable goods" and yes fuel is one of those goods. Is not it the price supposed to be similar in these two countries even the prices were converted in the same currency. Hence, the illegal trading between borders became quite significant problem. People tries to buy fuel in Malaysia and sell it in Thailand with a mark up price, but still lower than Thai's market price for oil.
For example, the exchangeable goods tend to have a similar price in each country but the non- exchangeable goods ( especially services) do not account for the same rules, but why? Non- exchangeable / immobile goods tend to be cheaper in poorer country ( the good example would be labours, it would be much cheaper to hire labour in India than to hire in the States.! ) Hence, the GDP based on exchanged rate would be over estimated in poor country ( they treated the exchangeable goods across the country with the same prices but not that non- tradable are cheaper.)
In order to compare countries' GDP in a more effective way, group of people came up with the PPP ( Purchasing Power Parity) ratio. This theory basically works by setting up a "SAME" type of good and compare how many unit of each country's currency will cost consumer. The example given in the video was pretty clear; the comparing BIg MAC price in the States and Thailand. The Big mac in thailand cost twice cheaper than in the states, this indicates that the standard of living in these two countries are different. The same good contains the same material, but even you convert the prices into the same currency. Thailand appears to have the cheaper price because its standard living is lower than the states's; basically it's cheaper to live in Thailand.
Example for MALAYSIA!
- The oil price in Malaysia is quite reasonable compared to the price in thailand. In thailand, the price of fuel is really expensive ( the price has gone up almost as twice as in Malaysia even though these two countries are next to each other) The fact that Thailand does not have many oil resources as Malaysia does, but if we think in term of "Exchangeable goods" and yes fuel is one of those goods. Is not it the price supposed to be similar in these two countries even the prices were converted in the same currency. Hence, the illegal trading between borders became quite significant problem. People tries to buy fuel in Malaysia and sell it in Thailand with a mark up price, but still lower than Thai's market price for oil.