The price of a bag of groceries in China and USA are as following: A bag of groc

Question

The price of a bag of groceries in China and USA are as following: A bag of groceries in China 18 eggs: Y5 5 pounds apples: ¥25 12 bottles of sparking water: Y 15 2 gallons of milk: Y20 1 pound of chicken breast: Y10 1 pound of grounded pork: ¥ 10 1 pound of sweet onion: Y3 1 pound of spinach: Y2 A bag of groceries in USA 18 eggs: $2 5 pounds apples: $S 12 bottles of sparking water: $8 2 gallons of milk: $3 l pound of chicken breast: $4 l pound of grounded pork: $5 1 pound of sweet onion: $1 1 pound of spinach: $2 The exchange rate between Chinese Yuan and Japanese Yen is I JPY 0.05982 CNY The exchange rate between Japanese Yen and USD is 1 JPY 0.009129 USD If China GDP/Capita 59,660 CNY, and US GDP/capita 57,467 USD. What is the difference between calculating China GNP/capita using the exchange rate and calculating China GNP/capita using PPP?

Explanation / Answer

For determining the exchange rate we know that 1 JPY = 0.05982 CNY and also 1 JPY = 0.009129 USD so we can calculate the excahnge rate for CNY related to USD.

0.05982 CNY = 0.009129 USD

or 59820 CNY = 9129 USD ( multipying both sides by 100,000)

or 1 USD = 59820/9129 = 6.55 CNY.

Now we will find out PPP for Chinese yuan by comparing it to a basket of goods given in the example above. It shows that this basket of goods costs 90 Yuan and 30 US dollars (by adding the cost price of goods on both sides).

Hence PPP exchange rate is 30 USD = 90 Yuan or 1 USD = 90/30= 3 CNY

Now we have to simply calculate the Chinese GNP based on the two exchange rates.

China GDP as per exchange rate = 59660 / 6.55 = $9108 (approx.)

China GDP as per PPP = 59660 / 3 = $19,887 (approx.)

If we talk about the diffrennce the we can clearly see that GDP as per PPP is clearly higher then the GDP as per th exchange rate. However in both the cases the GDP of US is higher then that of China.

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