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Hi,

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However, in the case of non tradable goods and services, their prices in a country are set by factors internal to that country, such as the per capita income level, social customs, and supply and demand situation. As such, it is not correct to assume that the above mentioned two persons can buy the same basket of goods and services in France and Bangladesh with their US dollars.


The per capital income calculated using the PPP method avoids this problem by considering the purchasing power of the local currency. This method, for example, takes the quantities of goods and services produced in Bangladesh over a year and multiplies them by the prices of those goods services in the US, to get the GDP of Bangladesh in the US dollar. The resulting GDP is then divided by the population figure of Bangladesh to get the per capita income of Bangladesh. It is interesting to note that, the per capita income of Bangladesh calculated by the PPP method is likely to be three to four times higher than that by the exchange rate method, as the PPP method values non-traded goods and services in Bangladesh at international prices which are much higher that those in Bangladesh.


As a developing country employ efficient methods of producing goods and services, its per capita income grows. As a simple explanation, we can say that, along with other things, an increase in per capita income, allows at least some non-tradable goods and services to get valued at prices comparable with international levels.