Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?

In order to measure and compare the GDP of various countries, we convert the GDP to a uniform currency so as to make direct comparisons. This is done by 2 ways, by market exchange rate and PPP equivalent exchange rate.

Market exchange rate is the equilibrium determined by the market forces of demand and supply and the rate at which a currency can be exchanged for the other.

PPP exchange rate is the rate which also comments about the purchasing power parity of the 2 countries' currencies.

Market exchange rate is the rate determined by the market forces daily, depending on the demand and supply on the day-to-day basis. It hence is highly fluctuating and can be used for a short term comparison. It will not hence reflect the true value.