How to Convert Currencies with Exchange Rates?

To compare the GDP of countries with different currencies, it is necessary to convert to a “common denominator” using an exchange rate, which is the value of one currency in terms of another currency. 

We express exchange rates either as the units of country A’s currency that need to be traded for a single unit of country B’s currency, or as the inverse. 

We can use two types of exchange rates for this purpose, market exchange rates and purchasing power parity (PPP) equivalent exchange rates. 

Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign exchange markets. 

PPP-equivalent exchange rates provide a longer run measure of the exchange rate. For this reason, economists typically use PPP-equivalent exchange rates for GDP cross country comparisons. We will discuss exchange rates in more detail in Exchange Rates and International Capital Flows.

Related Topics

• Macroeconomics
• Macroeconomic Frameworks
• Macroeconomic Policy Tools
• Productivity Economics
• One-Third Rule
• Gross Domestic Product (GDP)
• Durable and Non-Durable Goods
• Weightless Economy
• Intermediate and Final Goods or Services
• Nominal GDP
• Converting Nominal to Real GDP
• GDP Inflator
• Nominal GDP Price Index
• Measuring GDP
  
• Gross National Product
• Net National Product
• Factor Income
• Gross National Income
• Expenditure Method
• The Problem of Double Counting GDP
• Double Counting
• Why is Tracking Real GDP Important? 
• Convert Currencies with Exchange Rates
• Convert GDP to a Common Currency
• Per Capita GDP
• GDP Per Capita
• GDP as a Measure of Society Well-Being
• Limitations of GDP as a Measure of the Standard of Living