I've lost the count of the number of times I've heard people say, "India is the the third richest country in the world today." I'am not an economics student by far, but i know this statement is holistically vague and my own understanding suggests that there is a lot to be understood about the basis from which the above conclusion could be withdrawn.
The term that first needs to be understood is the Gross Domestic Product (GDP). GDP is the monetary value of all the final goods and services produced (ones that are officially accepted) within the borders of that country in a specific period. There are various methods of calculation of the GDP. The figure thus obtained upon calculation is called the GDP(nominal). This raw figure, is a figure which is not adjusted for different standards of living in different countries. The standard of living in a country depends upon a measure of a lot of factors including poverty rate and inflation adjusted income per person among a host of others. Inflation is the rise in the general level of prices for goods and services in a certain period. It is a measure of annual percentage change in what is known as Consumer Price Index(CPI). CPI is a measure of change in the prices of a defined set of goods and services over a certain period of time. These consumer goods and services classified as household items, personal goods and services and other such categories, together constitute what is known as the Consumer Basket. Therefore, the measure of an overall change in the prices of items, which are within the ambit of the Consumer Basket, is called the CPI. This rate of change in CPI, is known as inflation.
A rise in inflation in-turn means a decrease in Purchasing Power. Purchasing Power is nothing but the number of goods that can be purchased with a unit currency. For example, we all have heard our grandparents talk about the myriad items that could have been bought with a single rupee in hand during their time. Today, a single rupee hardly values anything, indicating that the purchasing power was much higher during their days and has considerably decreased over the period of time.
A rise in inflation therefore means, that every unit currency will buy a smaller percentage of goods. For example, if the inflation rate is 5%, then a 10 rupee wafer packet will cost Rs. 10.05 in a year.
Coming back to GDP, therefore, the obtained figure of GDP(nominal), will appear higher than what the real GDP actually is. For example, if the GDP growth in a year is 8% and the rate of inflation is 4%, then even though the GDP(nominal) figure would be calculated at 8% growth, the real growth in GDP will only be 4%. India ranks 9th among the 183 member countries of the International Monetary Fund(IMF) in the GDP(nominal) list of 2011.
Now the GDP figure estimates derived from the Purchasing Power Parity calculations is called the GDP(Purchasing Power Parity) figures. The theory of Purchasing Power Parity estimates the amount of adjustment needed on the rate of exchange between countries in order for the exchange to be equivalent to each currency's purchasing power. For example, a pack of cigarettes that sells for Rs.10 in New Delhi should cost US$ 1.00 in a U.S. city when the exchange rate between India and U.S. is 10 USD/INR(Both packs cost U.S.$ 1.00). As per the IMF list of 2011 for GDP(PPP) figures, India is ranked third among the 183 member countries of the IMF.
This information when looked at, within the ambit of its own existence, makes one believe that Indians are among the richest people of the world. However, its only when one looks at the GDP at PPP per capita figures, does one get a better understanding of the standard of living of an average Indian and the wide disparity among the 2 Indias that exist today.
GDP(PPP) per capita is obtained by dividing the GDP figure by the number of people in the country. This figure particularly useful as it helps in comparing relative performances between countries. Here, India ranks abysmally low, at 127th position, among the 183 member countries of the IMF (2011 figures).
A rise in per capita GDP signals growth in economy. A higher per capita GDP is interpreted as having a higher standard of living. So after 60 years of independence, the indication of the standard of living of an average Indian citizen is quite comprehensible. The policies of the Indian Government have been such that the wealth keeps getting accumulated in the hands of the ones who already hold its possession. Therefore, the gap between the affluent and the impoverished is widening by the day. India is getting richer, but Indians, so to speak, aren't. And this is where, as of today, India stands and not where some vague vignettes project it to. Figures themselves as such, do not mislead. It is us, who make them mislead.
The term that first needs to be understood is the Gross Domestic Product (GDP). GDP is the monetary value of all the final goods and services produced (ones that are officially accepted) within the borders of that country in a specific period. There are various methods of calculation of the GDP. The figure thus obtained upon calculation is called the GDP(nominal). This raw figure, is a figure which is not adjusted for different standards of living in different countries. The standard of living in a country depends upon a measure of a lot of factors including poverty rate and inflation adjusted income per person among a host of others. Inflation is the rise in the general level of prices for goods and services in a certain period. It is a measure of annual percentage change in what is known as Consumer Price Index(CPI). CPI is a measure of change in the prices of a defined set of goods and services over a certain period of time. These consumer goods and services classified as household items, personal goods and services and other such categories, together constitute what is known as the Consumer Basket. Therefore, the measure of an overall change in the prices of items, which are within the ambit of the Consumer Basket, is called the CPI. This rate of change in CPI, is known as inflation.
A rise in inflation in-turn means a decrease in Purchasing Power. Purchasing Power is nothing but the number of goods that can be purchased with a unit currency. For example, we all have heard our grandparents talk about the myriad items that could have been bought with a single rupee in hand during their time. Today, a single rupee hardly values anything, indicating that the purchasing power was much higher during their days and has considerably decreased over the period of time.
A rise in inflation therefore means, that every unit currency will buy a smaller percentage of goods. For example, if the inflation rate is 5%, then a 10 rupee wafer packet will cost Rs. 10.05 in a year.
Coming back to GDP, therefore, the obtained figure of GDP(nominal), will appear higher than what the real GDP actually is. For example, if the GDP growth in a year is 8% and the rate of inflation is 4%, then even though the GDP(nominal) figure would be calculated at 8% growth, the real growth in GDP will only be 4%. India ranks 9th among the 183 member countries of the International Monetary Fund(IMF) in the GDP(nominal) list of 2011.
Now the GDP figure estimates derived from the Purchasing Power Parity calculations is called the GDP(Purchasing Power Parity) figures. The theory of Purchasing Power Parity estimates the amount of adjustment needed on the rate of exchange between countries in order for the exchange to be equivalent to each currency's purchasing power. For example, a pack of cigarettes that sells for Rs.10 in New Delhi should cost US$ 1.00 in a U.S. city when the exchange rate between India and U.S. is 10 USD/INR(Both packs cost U.S.$ 1.00). As per the IMF list of 2011 for GDP(PPP) figures, India is ranked third among the 183 member countries of the IMF.
This information when looked at, within the ambit of its own existence, makes one believe that Indians are among the richest people of the world. However, its only when one looks at the GDP at PPP per capita figures, does one get a better understanding of the standard of living of an average Indian and the wide disparity among the 2 Indias that exist today.
GDP(PPP) per capita is obtained by dividing the GDP figure by the number of people in the country. This figure particularly useful as it helps in comparing relative performances between countries. Here, India ranks abysmally low, at 127th position, among the 183 member countries of the IMF (2011 figures).
A rise in per capita GDP signals growth in economy. A higher per capita GDP is interpreted as having a higher standard of living. So after 60 years of independence, the indication of the standard of living of an average Indian citizen is quite comprehensible. The policies of the Indian Government have been such that the wealth keeps getting accumulated in the hands of the ones who already hold its possession. Therefore, the gap between the affluent and the impoverished is widening by the day. India is getting richer, but Indians, so to speak, aren't. And this is where, as of today, India stands and not where some vague vignettes project it to. Figures themselves as such, do not mislead. It is us, who make them mislead.
