Gross Domestic Product (GDP) and income levels across countries are often compared by converting national data into a common currency using exchange rates. However, exchange rates are not able to reflect the relative international prices of all the goods and services that are included in GDP. Indeed, while exchange rates reflect relative prices in goods and services that are traded internationally, they do not reflect relative prices of a number of products, particularly many services, for which international markets do not exist. In addition, exchange rates are also affected by many other factors such as interest rates and capital flows which can often induce volatility that is unrelated to price developments across countries.
PPPs, on the other hand, are currency conversion rates that correct for the differences in price levels across a broader basket of goods and services that better reflects the goods and services that are included in GDP. The Eurostat-OECD PPP programme covers a basket of around 3000 goods and services, reflecting all categories of final demand (including consumer goods and services, government services, investment goods as well as net exports). When applied to nominal values of GDP or final consumption, PPPs enable comparisons in real terms (volumes) of these aggregates.
PPPs provide also a clearer picture of the relative size of economies.
Source: Eusostat and OECD databases
PPP-based GDP data provide a clearer picture of the relative importance of economies than comparisons based on market exchange rates. On the basis of the 2014 results, the ten largest economies in the OECD and Europe, measured on a PPP basis, are the United States, Japan, Germany, France, United Kingdom, Italy, Mexico, Korea, Canada and Spain. Comparisons between exchange-rate and PPP based GDP data reveal the importance of PPP-based conversions.