India is 3rd in terms of GDP at PPP

Read Time:3 Minute, 12 Second

Nominal GDP is the aggregation of all Gross Value additions in one year in any country at prevailing prices. It sums up all Business outputs, Business Investments, Government spending and Net Imports

Nominal GDP of top 10 Countries

“World Economic Outlook Database, October 2019”. IMF.org.

But wait before we jump into conclusion let us try to understand how the denominator USD itself gets calculated

We all know value of one Rupee today is more than one Rupee tomorrow. This universal truth is valid for all the ‘financial assets’ in the world (including Fixed Deposits, Shares, PPFs, etc.). If we deflate value of a Dollar in 1960 with the yearly inflation that US underwent till 2019, the residual value of a dollar is 11.6 cents. Similarly a Rupee in 1960 has a purchase value of 1.4 Paisa due to inflation in India. We saw that Indian currency lost its value on time horizon faster than USD due to relatively higher inflation rate viz a viz US economy’s inflation. Indian Rupee lost its value 8.26 faster than USD. When we multiply this inflation parity factor of 8.26 with exchange rate of 4.76 INR/USD as on 1960, we get value of 39.33. This is the value of Dollar had all the valuations being driven by inflations/deflations.

Dollar value versus INR (split between inflation and other factors)

But that is not the case as Dollar rate on 2019 was 71 INR/USD. There is a settled gap of 32 Rupees as on 2019. This means that parity rate is not purely out of inflation of countries, there are other factors responsible for the gap in parity index such as standard of living, cost of living (inflation), resources of countries, fiscal health of the countries etc. viz a viz to each other.

The Big Mac Index is the price of the burger in various countries that are converted to one currency (such as the US dollar) and used to measure purchasing power parity. As per Big Mac Index USD should value at 33 INR in terms of purchase power of an identical burger in India vs USA. INR 33 is Not very far from our calculated value of 39 INR. As we mentioned earlier, this is due to several factors working simultaneously on the valuation of relative parity index of two countries.

Big Mac Index source :*https://fxssi.com/big-mac-index*

Hey we just demonstrated that the value of burger is different in different countries

The World Bank releases PPP index calculated by estimating set of prices for items chosen from a common list of precisely defined items participating countries. These common lists include both regional items, priced in the region, as well as global items, priced in all ICP regions. These sets of prices cover the whole range of final goods and services included in the GDP: household consumption expenditures, government expenditures, and gross fixed capital formation expenditures. [2]

Now that we have Nominal GDP in local currency and PPP Index, let us divide both numbers. you will find a new global power order. China tops the list with 27.31 Trillion USD followed by 21.44 Trillion USD and India at number 3 position with 5.75 Trillion USD GDP at PPP.

BJP leaders must stop saying publicly that India’s GDP sixth largest in the world. … India’s GDP third largest today
Dr Subramaniyam Swamy (Rajya Sabha MP, Fmr. Union Cabinet Minister, Harvard Ph.D in Economics ) in his tweet on 19th March 2019