GDP Measurement Anomolies

The arbitrariness of using current exchange rates to measure the size of economies in $ is illustrated by the relative position of Nigeria and South Africa. There was much consternation when Nigeria surpassed SA as Africa’s largest economy when its GDP was rebased thanks to a strong official rate of exchange (as opposed to black market rate) and larger population. Now that the naira has been allowed to weaken and the rand has strengthened SA is again (but possibly very temporarily!) in the lead ($301bn to $296bn recently). This is despite no significant change in the real GDP as measured by purchasing power within the economies. Underdeveloped countries tend to come out better on this purchasing power basis (with China at #1). The Economist’s Big Mac index is frequently quoted to  illustrate the purchasing parity basis by comparing the price of Big Macs in various countries converted at the ruling exchange rate to show which currencies might be over or under valued. Initially a light hearted take on the subject it has become something of an institution. Switzerland tends to have the most overvalued currency – about 30% currently – and the rand undervalued (58%).

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