Why is PPP higher than GDP in developing countries

As we know, developed countries have more capital compare to labor and developing countries have more labor compare to capital.

Heckscher-Ohlin theory says that a county which has capital more than labor, country produces capital abundant goods like car, computer etc. It means that capital abundant goods are cheaper than labor goods relatively .Likewise, a country has labor more than capital , it produces labor abundant goods and they become cheaper than capital abundant goods in the country.

GDP (gross domestic production) is total output of the country. PPP (Purchasing Power Parity) is how many things can we buy with 1$ in the country, if we explain easily.

When we compare GDP and PPP, we’ll see developing countries’s PPP is higher than GDP. Why?

Firstly, PPP’s basket more include labor abundant goods like food and dress and then developing countries more produce labor abundant goods and then they export them to developed countries. So labor abundant goods have become more cheaper in developing countries and they can buy cheaply.

Secondly, Non-trade services like hairdresser are much lower in developing countries because labor wages are so much low.

To sum up, PPP is generally higher than GDP in developing countries.

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